Mortgage

Suggestions for getting a low earnings mortgage accredited

Low income shouldn't stop you from taking out a mortgage

Many tenants who don't make a lot of money assume that they could never own a home.

That's just not true.

Mortgage lenders are not that concerned about your income. Income is only part of the mortgage approval process, and not even the most important one.

Don't have a sky-high income? It might still be worth checking your eligibility to buy a home. Here's what you should know.

Check your mortgage eligibility. Start here (November 4th, 2021)

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Income is not the most important part of your mortgage application

Many potential homebuyers assume that a lender would take a look at their paychecks and send them away.

But a lender would be foolish to do so.

Because income alone does not determine whether you are qualified.

Rather, what matters most are your planned future mortgage payments compared to your income. This will determine if you can afford the home, which is far more important than looking at income in a vacuum.

To determine affordability, lenders look at your debt-to-income ratio (DTI).

DTI compares your current debt payments to your income.

This ratio is far more important than raw income data. In fact, a lender would much rather approve a borrower who makes $ 30,000 per year on a DTI of 28% than one who makes $ 200,000 per year on a DTI of 50%.

Let's break things down with a closer look at how DTI is calculated and why it matters.

A closer look at DTI and why it matters

Lenders love applicants with low debt-income ratios.

Thanks to low debt repayments, applicants can manage their finances well despite their low income. This type of applicant is a "good" credit risk.

Let's look at two applicants and how lenders rate them.

Low incomeHigh incomeMonthly income$ 2,500 $ 10,000Future house payment$ 650 $ 2,500Taxes, insurance, HOA$ 200 $ 450Car payment$ 100 $ 700Credit card payment$ 25 $ 350Boat payment$ 0 $ 800Total debt payments$ 975 $ 4,800DTI39%48%

The lender will have a much easier time approving the low income applicant in this example. Typically, the DTI limit for conventional loans is 43%. As it stands, only the low-income applicant makes the cut.

Check your mortgage eligibility. Start here (November 4th, 2021)

Low income mortgage programs

Non-high income applicants can be approved for any type of loan. There is no “minimum income” for a mortgage, period.

If the borrower's mortgage payment and other debts were low enough, a lender could approve someone with an income of $ 10,000 a year or even less!

However, this assumes that the borrower can meet the prepayment requirements and pay the closing costs – a difficult hurdle, especially for many first-time home buyers.

Here's the good news: there are many loan options available today that cater to low-income families. In fact, many agencies set income caps on their programs.

Some of these examples are given below.

1. USDA loan

The USDA loan is a great option for lower income borrowers as it does not require a down payment and comes with lower mortgage insurance than FHA loans.

Part of the eligibility check is the location of the property. The U.S. Department of Agriculture (USDA) sets limits on these zero-down home loans.

But rural and suburban neighborhoods across the country are also eligible. Many cities and towns outside of major metropolitan areas are within the USDA “rural area” boundaries.

These loans are so attractive, in fact, that the USDA has set maximum income limits on these loans to ensure that they are used by those who need them most. The current limits are 115% of the region's median income.

For example, below are the annual household income limits for popular areas across the country.

Portland, Oregon: US $ 111,200 Dallas, Texas: US $ 102,350Gainesville, Florida: US $ 91,900Flagstaff, Arizona: US $ 91,900

These moderate income limits are by no means restrictive. (They are even higher for households with more than four members.)

Still, they show that the USDA is focused on lower-income applicants. This can be seen in the DTI requirements of this program.

While the "by the book" DTI limits are set at 41% for USDA-backed mortgage loans, many borrowers can be admitted to higher DTIs with decent creditworthiness or other compensating factors.

As a lower-income homebuyer, check your USDA eligibility when applying for your home loan.

2. FHA loans

The U.S. Department of Housing and Urban Development operates the FHA loan program, which is designed to lower barriers to home ownership.

It's no surprise that lower-income borrowers flock to FHA.

Because the Federal Housing Administration insures these loans, lenders can approve applicants with very high DTIs. Plus, the program only requires a 3.5% discount for borrowers with a credit score of at least 580.

Unless you're making a high income, saving for a large down payment is next to impossible.

FHA loans were created in 1934 to enable low-income tenants to own a home with a long-term, stable loan product. Almost 90 years later, this loan program is still serving that purpose.

Credit crown is another area where FHA shines.

It is possible to get approved with a credit score of only 500 if you can pay a 10% deposit. According to software company ICE Mortgage Technology, approximately 25% of FHA loans are given to applicants with a credit score between 600 and 649.

Lenders aren't shy about approving low-income or poor credit homebuyers. And because federal mortgage insurance protects lenders, they can offer competitive interest rates to FHA approved borrowers.

3. VA mortgages

Most active military and veterans can use a VA loan.

With the support of the U.S. Department of Veterans Affairs, these loans do not require a down payment. The entry barrier is as good as nonexistent.

Plus, they don't need annual mortgage insurance – just a prepayment fee. This allows home buyers to qualify for more home than they would with standard programs.

Let's take a look at the total monthly mortgage payment for a $ 300,000 home:

VA credit decreased 0%Traditional 5% downMortgage rates *3.0% 3.25%Main interest$ 1,294 $ 1,240Mortgage insurance$ 0 $ 200Taxes, insurance, HOA$ 250 $ 250total$ 1,544 $ 1,690

* Mortgage rates are an example only. Your own interest rate will be different.

In this example, using a VA loan means saving $ 146 per month and skipping the 5% down payment. Anyone with current or previous military experience should check their VA eligibility first, whether or not they are on a low income.

4. HomeReady and Home Possible

Lower-income borrowers can also find conventional low-down payment mortgages with high DTI limits.

Traditional loans are not insured by government agencies like the FHA, USDA, or VA. Instead, they are regulated by Fannie Mae and Freddie Mac, who are sponsored by the federal government.

The Fannie Mae HomeReady loan requires only 3% less, and you can count the income from a boarding school or roommate that could lower your DTI and help you qualify for a larger mortgage loan.

Freddie Mac has a similar program called Home Possible. Home Possible allows you to use the income of a co-borrower who does not live with you to grow your application.

Traditional loans require private mortgage insurance (PMI). But unlike FHA and USDA mortgage insurance, you can cancel PMI once you have paid back the loan amount by 20 percent.

5. Good neighbor next door

The Good Neighbor Next Door program is available to certain public service employees, including law enforcement officers, teachers, firefighters, and paramedics.

In other words, jobs that are known to be paid much less than the job are really worth it to society.

As a “thank you” HUD, the FHA supervisor, is offering some of its own properties at a 50% discount. You can only choose from HUD's own family homes; one could not shop on the open housing market.

At 50 cents per dollar, even very low-income homebuyers could afford to buy a home through the GNND program.

6. Advance payment support programs

Many tenants assume that they will never be able to save enough money for a down payment. Well, you may not have to.

The Urban Institute reports that 82% of tenants in the US earn less than 120% of their area's median income – meaning these renters could likely qualify for a down payment assistance program.

Public housing authorities, city and district governments, and nonprofits are all sources of down payment loan and grants that could help you become an early homeowner.

These programs often require homeowner training courses, and some require higher credit ratings than no down payment mortgages.

Most programs only welcome first-time buyers, but this definition includes families who have not owned a home for at least three years.

To find homebuyer programs in your area, ask your real estate agent or simply go to Google for "Down Payment Support Programs (Your Area)".

You will be surprised to find thousands of dollars sitting there waiting to be used. In some cases, local governments can also offer tax credits.

Check your mortgage eligibility. Start here (November 4th, 2021)

How to buy more home on a low income

Income is important to mortgage lenders, but not because of the strict income requirements. Income counts in the context of your existing debt load and credit profile.

Even if you cannot increase your income, improving your financial situation before applying for a mortgage can increase your home purchase budget.

Start with:

Pay off some debts first. If you have a car loan or personal loan that is almost paid off, try paying it off before applying for your home purchase loan. This could lower your DTI and increase your home purchase budgetImprove your credit score. Errors in your credit report can affect your credit score. Challenging these could help you qualify for a larger home loan. And if you make a habit of paying your bills on time, your credit score should improve over timeSave some money. Bringing in your own down payment and closing fees simplifies mortgage qualification. If you can't save, find down payment assistance programs that are helping low-income families in your areaApplying with a co-borrower. A co-borrower's income could bolster your loan application as long as your co-borrower has a solid credit rating and is not burdened with heavy debtWith the right loan program. The right loan program should be tailored to your specific needs. For example, FHA loans work well for borrowers with lower credit scores, and USDA loans are great for applicants with no down payment. When you don't need this type of help, traditional loan can save you moneyUse location to your advantage. Sometimes you can find nicer homes for less if you are willing to shop outside of the most popular neighborhoods in your area

By strengthening your applicant status, you can earn lower monthly payments for the same house – all without increasing your income.

Do I have to pay for private mortgage insurance?

For many borrowers, mortgage insurance seems like an onerous extra charge on top of their monthly payments. Ultimately, this coverage protects the lender in the event of foreclosure even though the borrower has to pay for it.

But this protection also has a purpose for the borrower: it lowers the risk for lenders, which enables lower mortgage interest rates.

A conventional loan at a discount of 20% or more does not require mortgage insurance. VA loans do not require annual mortgage premiums even if you do not make a down payment.

But FHA and USDA backed loans – along with traditional loans less than 20% less – need that extra coverage.

USDA and FHA loans, in most cases, require prepayment for mortgage insurance, as well as ongoing annual premiums for the life of the loan. Traditional mortgages do not require prepayment and you can cancel the annual payments once you have paid off 20% of the loan.

Pre-approval can clear the secret

Not sure where you stand as a homebuyer? Pre-approval from a mortgage lender can reveal your price range.

Pre-approval mimics the mortgage application process, but without the tough credit check. It shows what amount of credit you could get based on your personal finances.

In addition to indicating your price range, pre-approval can show home sellers that you are a serious buyer. This is especially important when you are buying your first home.

How do I apply for a low income home loan?

Your income plays only a subordinate role in the loan approval. The lender puts much more emphasis on your monthly debt, your creditworthiness, and other factors.

That means you don't need a sky-high income to buy a home. You just need to be a responsible money manager.

Get a Personalized Home Buying Assessment Now. There is no obligation to continue and you might be surprised at what you can qualify for.

Confirm your new price (November 4, 2021)

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