If you have low income, you may think you can’t buy a home. Lenders look at your income, assets, and debt ratio, right? So how would you ever qualify if you don’t make top dollar for your area?
Luckily, there are programs out there catering to borrowers with a small income. In fact, the USDA program is only for those borrowers with low monthly income. You can actually make too much money and not qualify for that particular program.
Keep reading and we’ll teach you how to take advantage of the programs available for borrowers with little income.
What Does Low Income Mean?
First, we must discuss what low income actually means. No one will be able to secure a mortgage if they don’t make enough to afford the payments. You must have enough income that you can cover the mortgage and your existing debts. You should still have some money left over too. Lenders verify this fact by looking at your debt ratios.
Each loan program has its own debt ratio requirements. They are as follows:
- Conventional loans – 28% front-end ratio and 36% back-end ratio
- FHA loans – 31% front-end ratio and 43% back-end ratio
- VA loans – 43% back-end ratio
- USDA loans – 29% front-end ratio and 41% back-end ratio
As you can see, each program differs in their requirements. You’ll even find different requirements between lenders regarding the same loan program. Lenders must use the program’s guidelines at a minimum. But, they are free to add to those requirements if they want to tighten up the restrictions on the loans they write.
Low income in this case, means a small income for your area, but enough to cover the debts you must cover.
The USDA Loan for Low Income Borrowers
The most common low income loan is the USDA loan. In order to be eligible for this loan, you must buy/refinance a home in a rural area. The USDA sets the rural boundaries, though. You may be surprised to see which areas qualify, as we may not consider them rural.
You must also have a total household income that is less than the allowed amount for the area. Every adult in your household that makes an income must disclose the amount they make. You then total this amount and deduct any of the following allowances that apply to you:
- $480 for each child under 18 or over 18 and in school full-time
- $480 for each disabled relative living with you
- $400 for each elderly person living with you
If after deducting the allowances your income fits within the guidelines for your area, you may be eligible for the program.
Once you are eligible, you must qualify for the loan. This pertains only to the borrower and co-borrower now. You must be able to prove you have the income to cover the proposed housing payment, with a debt ratio no higher than 29%. You must also prove that your total debt ratio doesn’t exceed 41%.
If you meet these requirements and the house meets the USDA appraisal requirements, you are well on your well to securing a USDA loan.
The VA Loan for Veterans
The VA provides 100% financing to veterans of the military, including those serving in the National Guard or Reserves. You do not need a down payment for this program and the VA doesn’t focus on your debt ratio.
Instead, the VA looks at your disposable monthly income. You have left this money after paying your monthly bills, such as the mortgage, installment loans, and credit card bills. Each area has a specific amount of disposable income required based on your family size.
As long as you have the income to cover your housing payment and existing monthly debts, you may qualify. You don’t have to make a certain amount of money for the program. The size and price of the house are what determines how much you must make to afford it. As long as your total debt ratio doesn’t exceed 43% and you have enough disposable income to meet the VA guidelines, you are in good shape.
The FHA Loan
The FHA program is also great for borrowers with low income. This is another government-backed loan program with flexible guidelines. The FHA requires borrowers to have a maximum 31% housing ration and 43% total debt ratio.
You do need a down payment for FHA loans, but only 3.5% of the purchase price. If you bought a $150,000 loan, you’d need $5,250 down. But, the FHA does allow you to accept gift funds from relatives, friends, or even your employer. The seller can also help you with the closing costs. It’s possible to come to an FHA closing with no money and still walk away with keys to your new home.
Don’t make the mistake of thinking you can’t buy a home if you have low income. Several programs cater to buyers just like you. The key is to shop around and find the best deal. Talk to lenders about the different programs that apply to you. This way you can receive quotes for each program, allowing you to choose the loan that works best for your financial situation.