How to buy a house with low income

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If you have a stable job but earn less than you’d like, you might be wondering whether you’d be able to afford a home. While you do need sufficient income to qualify for a mortgage, your earnings are just one piece mortgage lenders consider. There are also several mortgage programs that are specifically geared toward lower-income borrowers.

Can I buy a house with low income?

Yes, you can buy a house with low income, provided you can reasonably afford the mortgage, maintenance and other expenses associated with owning a home.

When you apply for a mortgage, your lender evaluates your debt-to-income (DTI) ratio, a key measure of how your income stacks up against your mortgage and other debt payments.

“Having a low income can increase your debt-to-income (DTI) ratio,” says Balenda Hetzel, a regional vice president with CrossCountry Mortgage. “This limits some of the loan program options you may be eligible for, but it does not mean you absolutely cannot buy a home.”

Lower-income mortgage programs

There are several mortgage programs tailored to lower- and moderate-income borrowers. Some of these offer more leeway with income, but still impose certain requirements. Here’s a rundown.

HomeReady mortgage

Income requirement: Can’t exceed 80% of your area’s median income

DTI requirement: No more than 45% (50% in some cases)

​​Fannie Mae’s HomeReady mortgage program addresses one of the challenges of buying a home with a low income by requiring just 3 percent of the home’s price as a down payment. With this loan, your down payment and closing cost funds can come from other sources beyond savings, including grants and gifts, and you don’t need to contribute any of the money personally.

Some very low-income borrowers may qualify for up to $2,500 in closing costs and down payment assistance with this loan.

To qualify, your income can’t exceed 80 percent of the area median income (AMI) for the location where you’re buying a home. (You can look up local limits using Fannie Mae’s tool.)

While you can put down as little as 3 percent with a HomeReady mortgage, you’ll need to pay for private mortgage insurance (PMI) until you attain 20 percent equity. You’ll pay the mortgage insurance with your monthly mortgage payment, which will add to that cost, but it’s easy to get out of once you hit that 20 percent.

In addition, you can add a co-borrower to a HomeReady mortgage, even if that person isn’t planning on living in the home.

“Unlike other home loans, all borrowers do not have to reside in the property,” says Roselina D’Annucci, a New York–based real estate attorney with the Law Offices of Serrano and Associates, P.C. “For example, parents who won’t be living in the home can be co-borrowers on the loan to help their children qualify for a mortgage.”

With a HomeReady mortgage, your mortgage lender can also consider your rent payment history to help qualify you for the loan, says D’Annucci.

Home Possible and HomeOne mortgages

Income requirement: Can’t exceed 80% of your area’s median income for Home Possible; none for HomeOne

DTI requirement: No more than 45% (50% in some cases)

Like a HomeReady mortgage, Freddie Mac’s Home Possible and HomeOne mortgages require just 3 percent down. The down payment funds can come from many sources, including family members, employer-assistance programs and even sweat equity (if you have the skills to provide labor or materials to renovate the home, that is).

Unlike HomeReady and Home Possible, a HomeOne mortgage does not have income or geographic requirements to qualify, but you will need to pay for mortgage insurance if you put down less than 20 percent.

“There are a few other strings attached, too: If you are a first-time buyer, you will be required to go through a homeownership education program,” says Tabitha Mazzara, director of Operations at MBANC, a mortgage lender.

The first-time buyer class requirement also applies to the HomeReady program.

FHA loan

Income requirement: None

DTI requirement: No more than 43% (50% or more in some cases)

You can get an FHA loan, which is insured by the Federal Housing Administration, for as little as 3.5 percent down if your credit score is 580 or higher.

“This loan has less stringent requirements that can help low-income borrowers or those with poor credit histories,” says Gerwin Wallace, a mortgage loan originator with Silverton Mortgage in Anniston, Alabama. “You may pay lower closing costs with this loan, as well.”

If your down payment is less than 10 percent, however, FHA loans come with lifetime mortgage insurance (in other words, it can’t be canceled). The home you want to buy must also pass an appraisal to ensure it meets FHA safety guidelines.

VA loan

Income requirement: None

DTI requirement: No more than 41%

Possibly the least expensive way to buy a house with a low income is a VA loan, which is available to active-duty service members, veterans and surviving spouses. With a VA loan, you don’t have to put any money down or pay for mortgage insurance, the closing costs might be less than what other loans might incur and you could get a lower interest rate than you would with other financing options.

In addition, the VA loan is a lifetime benefit; that means if you’re eligible, you can get a VA loan multiple times.

However, you’ll need to pay a funding fee for this mortgage, the amount of which depends on whether you’ve gotten a VA loan before and how much down payment you’re making, if any. This is an additional cost to consider.

To qualify for a VA loan, “you must have good credit, a steady income and a Certificate of Eligibility from the VA,” says Mazzara. “Also, your loan amount must not exceed the appraised value of the house.”

USDA loan

Income requirement: Can’t exceed 115% of your area’s median income

DTI requirement: No more than 41% (44% in some cases)

Another generous mortgage program is the USDA loan, which, like the VA loan, requires no money down. You don’t have to be a first-time buyer to get a USDA loan, either.

However, the home must be located in an eligible rural area, which means you might only qualify if you’re buying far from a city — although many suburban areas are also eligible for USDA financing, according to Wallace.

Also, your income can’t exceed 115 percent of the AMI, and you’ll pay mortgage insurance with this loan, too, in the form of an upfront guarantee fee and then annual fees.

Good Neighbor Next Door program

Income requirement: None

DTI requirement: No more than 43% (Higher in some cases)

Good Neighbor Next Door is a homebuying program available to law enforcement officers, teachers, firefighters and emergency medical technicians. The program, administered by the U.S. Department of Housing and Urban Development (HUD), allows borrowers to buy a home for 50 percent off list price in exchange for living in the property for at least three years.

However, the home has to be a property in a HUD-determined “revitalization area” and listed for sale through the program, and the listings are only available for purchase for seven days. You’ll also need to get a second mortgage and note to qualify for the discount — but you won’t be on the hook for the second mortgage or any interest on it, so long as you fulfill the three-year residency requirement.

HFA loan

Income requirement: Varies by area and loan program

DTI requirement: No more than 45% (Higher in some cases)

Not to be confused with an FHA loan, an HFA loan is another type of low-income mortgage through Fannie Mae (called “HFA Preferred”) and Freddie Mac (called “HFA Advantage”) that requires only 3 percent down. HFA loans are available through state housing finance agencies (HFAs), which partner with mortgage lenders to offer affordable loans to lower-income borrowers. In many cases, you don’t have to be a first-time buyer to qualify, and you might get down payment assistance, as well.

State and local down payment assistance programs

Income requirement: Varies by program

There are a variety of local down payment assistance (DPA) programs, and they are typically geared toward lower- to moderate-income borrowers. These programs usually come in the form of a grant or loan, the latter of which might need to be repaid or could be eligible for forgiveness after a certain amount of time.

For example, the Department of Housing and Community Development in Maryland has a Partner Match Program. The program facilitates down payment assistance through certain employers, homebuilders or community organizations. These funds can then be matched through the state for up to $2,500.

Mortgage credit certificate

Income requirement: Varies by area and loan program

A mortgage credit certificate (MCC) is a federal tax credit that can help low- and moderate-income or first-time buyers offset some of the money they owe in mortgage interest. Unlike a tax deduction, MCCs offer a dollar-for-dollar tax credit of up to $2,000 to those eligible annually. An MCC isn’t free, however, so if you qualify, consult with a tax professional to learn if this is the right move for you. Often, the savings over a 30-year mortgage exceed the upfront fee.

Manufactured and mobile home loans

Income requirement: Varies by area and loan program

DTI requirement: Varies by loan program

Interested in a manufactured or mobile home? There is special financing for this property type that can be ideal for lower-income borrowers.

“For example, MH Advantage is a Fannie Mae loan program designed to finance manufactured homes,” says Wallace. “It features low down payment options, low monthly payments and reduced interest rates compared to most standard loans for manufactured homes. Also, it offers the ability to combine HomeReady, HFA Preferred mortgage and other mortgage programs without being tied to any one specific program.”

How to buy a house with low income

Follow these steps to buy a house with low income:

1. Know your current financial situation

Knowing the facts about your personal finances can help you plan for buying a home. Understand your current DTI, credit score and how much you already have saved for a down payment and closing costs, as well as how much you can reasonably afford to spend on a monthly mortgage payment.

When you figure out these numbers, you can better understand which loans you may qualify for. You can also determine if you need to save more money before looking for houses.

2. Explore lower-income loan options

Investigate lower- and moderate-income mortgages to learn which option might work best for your situation. Remember, these include:

• 3 percent conventional loans (HomeReady, Home Possible, HomeOne and HFA loans)
• FHA loans
• VA loans
• USDA loans

Look into down payment assistance, as well. If you can get more funds to put down, you won’t need to borrow as much with the mortgage, which could help lower your DTI.

3. Shop for a lender and get preapproved

Not all lenders are alike. You may be able to get a better rate with certain lenders. Talk to several before you settle on one.

It’s also a good idea to get preapproved for a loan. This will help you stand out as a buyer.

4. Find a home and apply for a loan

Once you find a lender and save up enough money, you can start shopping for houses. Work with an experienced agent to help you find the right home.

When you find a home you love, it’s time to put together an offer for the seller. When the seller accepts your offer, you will need to apply for the loan. This can take time, and may require you to send several documents and details to the loan underwriter.

5. Close on the home

When your loan application gets through the underwriting process and your loan is approved, you can close on the home!

You will need to pay closing costs and get ready to move into your new house. Make sure you save enough money for moving costs, some new paint and the right furnishings, too.

Tips for buying a home with a low income

Buying a home with low income can be a challenge. Here are a few tips to help make it happen:

• Save for a down payment and closing costs: While there are some loans that don’t require a down payment, most will require at least 3 percent down. If the house costs $350,000, 3 percent down is $10,500. Additionally, average closing costs in the U.S. are $6,905.
• Save for extra costs: When you buy a house, you will need to think about the costs of moving. Also save some money for any repairs or renovations you may want to do to the property before you move in. It’s a good idea to have some cash saved in case of emergency repairs, too.
• Work on your credit score: Credit score minimums may range anywhere from 500 to 640, depending on the type of loan you apply for. Improving your credit score takes time, so check your reports and score as soon as possible to get a plan in place. Do your best to pay down or pay off credit cards and other revolving debt balances, pay bills on time and avoid opening new lines of credit. (Note that getting preapproved for a mortgage will not harm your credit score.) In addition, look for any errors (such as incorrect contact information) on your reports. If you spot any inaccuracies, contact the credit bureau to get things resolved.
• Connect early with a loan officer: Even if you’re not ready to buy a home just yet, get in touch with a few loan officers to learn exactly what you’d need to qualify. The loan officer can help you understand the lender’s credit score, DTI ratio and other requirements, as well as fees. The loan officer could also prequalify you so you’ll know how much you can afford.
• Find a top buyer’s agent: Having a good real estate agent can help you find the best deals on properties. Interview several agents before you decide on one. Look for one who you work well with and who has knowledge of the market where you’re looking to buy.