Non-Qualified Loan

Buying a House With Low Income

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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?

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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.

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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 determine 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 incomes. 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.

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5 Ways to Tell if You Can Afford Your Dream House

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Before buying a home, you need to know how much you can afford. You may have the perfect number in your head, but does the lender agree? Knowing what you can afford before you look at homes saves time and frustration.

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Use the simple steps below to see how much home you can afford.

Know Your Monthly Debts

Chances are you have debts now. They won’t disappear just because you buy a home. Credit cards, installment loans, and student loans are a few examples. Lenders use these payments to calculate your total debt ratio.

Don’t worry, lenders don’t include utility bills, grocery spending, or insurance payments. They only consider the payments on your credit report.

If you notice you have too many debts, consider paying them down now. The fewer monthly debts you have, the easier it is to qualify for a mortgage.

Know Your Gross Monthly Income

Lenders look at your income before taxes. Do you earn an annual salary? Divide it by 12 – that’s your gross monthly income. You need this number to figure out your debt ratios. Lenders have different debt ratio requirements for each program.

If you work hourly or on commission, use your year-end W-2s to figure out your gross monthly income. Divide the annual income by 12. This gives you an average over the course of the year. This is important, especially with variable income.

Know Your Front-End Ratio

Lenders use your gross monthly income to determine an affordable mortgage payment. Each loan program has its own guidelines, for example:

  • Conventional loans – 28% housing ratio
  • FHA loans – 31% housing ratio
  • USDA loans – 29% housing ratio

Once you know your gross monthly income multiply it by the appropriate front-end percentage. For example, if you make $5,000 per month, your maximum mortgage payment on a conventional loan is $1,400 and $1,550 for an FHA loan.

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Use these numbers as a guide. Your total mortgage payment can’t exceed these amounts. Your total mortgage payment includes:

  • Principal
  • Interest
  • Real estate taxes
  • Homeowners insurance
  • Mortgage insurance (if applicable)
  • Calculate your Back-End Ratio

Your back-end or total debt ratio could reduce how much mortgage you can afford. This is where your total monthly debts affect things. Your back-end ratio is the maximum amount of your gross monthly income you can commit to your monthly obligations. This includes the new mortgage.

The back-end ratios are as follows:

  • Conventional loans – 36%
  • FHA loans – 41%
  • USDA loans – 41%
  • VA loans – 41%

Calculate your back-end ratio by adding up the new mortgage payment with your current monthly debts. Next, you should figure out your max total debt ratio. Do this by multiplying your gross monthly income by the appropriate percentage.

Using the $5,000 monthly income, you could have maximum debts of $1,800 for a conventional loan and $2,050 for government loans. If you want a $1,400 conventional mortgage payment, your other debts can’t be more than $400.

Does your income and debts fit this requirement?

Put the Number Into Your Budget

Thus far you have a fictitious number. Sure, it looks good on paper to have a $1,400 mortgage payment, but does it fit into your budget?

If you use a computer program or app to keep track of your budget, toss that $1,400 payment in there. How does your bottom line look? Do you still have money for your ‘other expenses?’ Can you still live the life you’re used to? Do you need to sacrifice? Are you willing to sacrifice?

If you don’t use a program or app, physically take $1,400 out of your bank account. What’s left? Can you cover your other bills? Do you have the cash to do the other things you want to do? Try this for a few months and see how it feels. Practicing before you own the home is a lot less risky than taking a chance on late payments and foreclosed homes.

Knowing how much mortgage you can afford before you shop for a home helps avoid delays. You can shop for a home within your budget. If you have the necessary qualifications for the loan, you’ll have fewer issues getting approved.

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How to Handle Cash Deposits When Applying for a Mortgage

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When you apply for a mortgage, your lender will look at your bank statements very carefully. They aren’t looking at where you spend your money, though, instead, they look at your deposits. They need a paper trail of every deposit so that they know its origination. If you have cash deposits, it could pose a problem with your mortgage application.

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Keep reading to learn how to get around this issue.

You Need Proof of the Funds’ Origination

If you have cash to deposit in your checking or savings account, you can do it, but you need proof of its origination. Let’s say for example that you have $1,000 in cash that you received from selling some antiques your grandmother gave you.

You could just go and deposit the money and think nothing of it. But if it is within two months of a mortgage application, the lender will question it. If you don’t have proof of where you got the funds, the lender will not be able to include the $1,000 in your available funds and they may even deny your loan.

On the other hand, if you had a Bill of Sale or receipt to show the lender that you sold the items, it could serve as your proof. The lender will compare the receipt to the deposit amount – make sure the amounts match perfectly in order for the lender to accept this form of proof.

The same method works for any type of cash accumulation, whether you sell stocks, sell a car, get a bonus from work, or get a gift from a family member. You need proof of the receipt of cash.

Gift Funds are a Little Different

If you do receive gift funds from a family member, you have a few more steps to take. The lender needs to know where the funds originated, but also that the donor does not expect you to repay the funds. In other words, the lender needs to know that you don’t have a loan somewhere down the line.

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You can prove gift funds with a few documents:

  • Gift letter – You need a gift letter from the donor stating that the funds are a gift, the amount of the gift, and the reason for it (purchasing a home). The letter should also state that the funds are a gift and there is no expectation of repayment.
  • Proof of the funds – The donor must provide his or her own bank statement showing ownership of the funds. Just like with you, the borrower, the bank statement shouldn’t show any recent large cash deposits. The lender needs to know that the funds the donor provides are his own funds.
  • Proof of transfer of the funds – The donor must write you a check, which you must keep a copy of to show the lender. You then deposit the check in your account, taking a deposit receipt as proof of the deposit, again, giving it to your lender.

Make Deposits Earlier Than 2 Months Before You Apply

One last method you can use if you need to make cash deposits in your account is to do so before you apply for the loan. Lenders typically only ask for bank statements from the last two months. If you do not have any large deposits within that time, you should be able to use the funds in there for your down payment and closing costs.

Lenders only look for recent large deposits. If you took out a loan more than two months ago, it would show up on your credit report and the lender would know about it already. It’s the loans that are new that don’t show up right away and could put the lender in a bind if they don’t catch it.

It’s wise to avoid any cash deposits when you want to apply for a mortgage in the near future, but sometimes it is just necessary. As long as you are upfront with your lender and tell them what the funds are from and you can document it, you should be in good shape. It is always wise to be honest with your lender as they can walk you through the program and take the steps necessary to get you approved.

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Can a Friend Provide Gift Funds for a Down Payment?

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The down payment is the largest obstacle when buying a home. First-time homebuyers struggle the most, because they don’t have equity in a home to sell. All money they put down comes from their own liquid assets.

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What if you don’t have the liquid assets? Can you get a gift from a friend? Technically the rules state that only family, your employer, or a charitable organization may provide gift funds. There are exceptions to the rule, though.

Proving the Friendship

Accepting money from a friend is different from accepting money from a family member or employer. What if the friend demands repayment? You may end up in a financially difficult situation. Will you default on your mortgage as a result? These are the issues lenders have with friends supplying gift funds.

However, that doesn’t mean you can’t accept gift funds from a friend. You will need to prove the friendship though. Family is easy to prove, whether a blood or marriage relationship. Friendship is a bit harder.

Lenders want to know how long you have known the friend and the depth of your friendship. Lenders want to know the friend is ‘close.’ Just how you prove this will vary by lender.

Proving the Gift Funds

No matter how you prove the friendship, you must prove the gift funds and their origination. You need a gift letter from the donor. Also, the donor must prove the origination of the funds. Just like you would have to do to use your own funds, lenders need to know there isn’t a loan lurking somewhere deep in the trenches here.

Let’s start with the gift letter. The donor must write a simple letter that states the amount of the gift, the reason/address of the property, and the date. The donor must also state that the funds are a gift and not a loan. They must state that no repayment is expected. This one sentence makes or breaks a gift letter.

Next, donors must provide proof of the funds. Are the funds in his/her bank account? The lender may source the funds with their income. If there are large deposits on the donor’s bank statements recently, the lender may ask about them. Basically, the lender needs to know if they are a loan from anywhere else.

If the donor sold a car, stocks, or any other asset, he or she must provide the bill of sale or any other proof of the sale. The lender needs solid proof that the funds aren’t a loan. Any funds the donor can’t prove may not be able to be gifted.

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What is the Maximum Amount you Can Gift?

Lenders typically allow 100% of the down payment to be a gift. Certain loan programs, like the FHA loan for borrowers with credit scores lower than 580 have different rules. The FHA requires the borrower to come up with at least 3.5% of the purchase price for the down payment. The remaining 6.5% may come from gift funds, though.

Aside from lender/loan restrictions, the IRS limits how much one person can gift you too. As of 2019, the IRS allows gifts of up to $15,000 without tax implications. If you receive any more than $15,000 from one person, you and the donor may have to report it at tax time.

Should a Friend Provide Gift Funds?

Before you accept gift funds, think about what it means. You shouldn’t be repaying the money, but how does the friend feel? Will the friend expect equity in the home? Will the friend expect to be on the title of the home? Working out these questions, no matter how difficult they may be to ask, is important.

You may even want to consult with your attorney before accepting gift funds. Make sure everything is on the up and up before you accept anything. Your lender isn’t the only person you have to face – you’ll face your friend for a much longer time in the future. Know his or her expectations before accepting the funds.

Gift funds are a great way to become a homeowner when you don’t have the money for a down payment. Many loan programs allow them, but exercise caution when accepting them. If they are from a friend, work out the fine details to avoid any issues in the future.

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Minimum Down Payment for Buying a Home

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You are ready to take the plunge and buy a home. You’ve heard the minimum deposit allowed is 20%. What if you don’t have that? Are you stuck renting for the rest of your life? Luckily, the answer is no. there are many factors that play a role in this answer, though.

We’ll explore each of these below.

No Deposit Required

Wouldn’t it be nice if you could find a loan program with no deposit required? Luckily, you can. The USDA and VA both offer programs with no down payment. In order to qualify, you’ll have to buy a rural property if using the USDA program. The VA program is reserved for those that served our country. If you fall into either category, you’ll enjoy the superior benefits of these programs.

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The USDA program has flexible guidelines along with the no down payment requirement. In fact, the program is for borrowers with low to moderate income. You can make too much money and not qualify for the program. You can see the USDA’s income guidelines here. Aside from the income requirements, you must also purchase a home within the USDA’s rural boundaries. You can view the eligible properties here.

Veterans also have the benefit of a no down payment program. In order to qualify, you must serve the appropriate time:

  • 90 days during wartime
  • 181 days during peacetime
  • 6 years in the National Guard or Reserves

If you meet the eligibility requirements, you’ll receive a Certificate of Entitlement. This gives you the right to buy a home with no down payment. Just like any other loan, though, you’ll need to qualify personally. For the VA loan, you’ll need a 620 credit score and a debt ratio no higher than 43%. The property must also pass the VA appraisal requirements.

Low Deposit Required

If you don’t qualify for one of the above no down payment loans, you have other options. Low deposit loans are the next best option. The most common is the FHA loan with a 3.5% down payment requirement. This loan doesn’t have maximum income or service requirements. It’s not just for first-time homebuyers either. As long as you meet the credit and income requirements, you may be eligible for the loan.

In order to be eligible, you’ll need at least a 580 credit score. You’ll also need a debt ratio that doesn’t exceed 31% on the front end and 43% on the back end. Lenders will also look for a decent credit history with no collections or other negative credit events in the recent past.

Some borrowers also qualify for a low down payment conventional loan. The down payment is slightly higher than the FHA loan, though. Conventional loans usually require a 5% down payment. In order to qualify, though, you’ll need exceptional credit and low debt ratios. Conventional loans generally have stricter requirements than FHA loans. However, they become even more restrictive with a low down payment.

Whether you take out an FHA or conventional loan with a low down payment, you’ll need to pay some type of mortgage insurance.

The FHA loan requires 0.85% annual mortgage insurance for the life of the loan. On a $200,000 loan, this means $142 per month or $1,700 per year. Your lender pays the insurance on your behalf on an annual basis. They then charge you 1/12th of the amount per month. The amount you pay decreases slightly each year as you pay the principal balance down. FHA MIP never expires. You pay it for the entire time you hold the loan, no matter your loan-to-value ratio.

Conventional loans also require mortgage insurance, but it’s different than the FHA loan. The amount you pay depends on your loan-to-value ratio and term of the loan. The longer you borrow the money, the higher percentage you pay. The difference between PMI and FHA MIP is that PMI can be canceled. By law, the lender must cancel it once you owe 78% of the value of your property. You can also request cancellation if you know your home appreciated or you paid the principal down enough.

Do You Ever Need 20% Down?

It might seem like you can get away with a low deposit with the large variety of loans available. Not everyone qualifies for these programs, though. In general, you need fairly good credit for these programs. The exception to the rule is the VA and USDA loans, but only certain people qualify for those programs.

Borrowers that don’t fall within these parameters may need a larger down payment. Conventional loans, as well as subprime loans, may be available, but for a higher down payment. Just how much you must put down depends on the lender and your parameters. Generally, the lower your credit score, the higher the required down payment. Your credit score helps lenders predict your level of financial responsibility. A low credit score equals a high risk in the eyes of the lender. If a lender approves you for a loan, it will usually be for a higher down payment.

The more money you have in the home, the more likely you are to make your payments. Lenders look at it like “skin in the game.” For example, if you invested $5,000 in a home, you might not fight hard to keep the home. But, if you had $20,000 invested, you may work much harder to make ends meet. This is why lenders often require higher down payments for risky loans.

If you want to lower the amount you deposit on a home, make your qualifying factors as attractive as possible. Fix your credit so that your score increases. Keep your debt ratio down and have liquid assets on hand. This way you prove to the lender that you are responsible and have money available should your income stop suddenly.

There are plenty of low down payment options. Shop around with different lenders to find the program that suits your needs the best!

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Mortgage Down Payment Gift Rules

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Did you know that you can accept gift funds for many loan programs? Gift funds help you come up with a down payment on a home. Before you accept money from just anyone and throw it in your account, though, you should know the rules.

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Each loan program has the same requirements regarding accept gifts for down payments. Yes, you can accept them, but you must follow the tips below.

How Much Money Can you Receive?

First, let’s discuss the amount you can receive. This varies by loan program.

  • FHA loans – If you have at least a 580 credit score, the entire down payment can be a gift. If you have a credit score between 500 – 579, you must contribute 3.5% of your own funds. The remaining 7.5% (for a total 10% down payment) can be from a gift. You can also use gift funds to help with closing costs.
  • Conventional loans – The entire down payment can be a gift as long as you buy a single-family property. If you buy a 2-4 unit property, at least 5% of the down payment must be from your own funds. Gift funds may also help you pay your closing costs.
  • VA and USDA loans – Neither VA or USDA loans require a down payment; you can get 100% financing, but you can use gift funds to cover the cost of closing the loan.

Who Can Gift you Money?

All loan programs have the same guidelines. You can accept gift funds from family, your employer, or a charitable organization. In some cases, you can accept funds from a friend, but you must be able to document your relationship, showing that you’ve been friends for a long time. If you are unsure if someone qualifies, ask your loan officer. When it comes to family, though, all family counts including relatives by blood, marriage, and step-family members.

Documenting the Gift Funds

Here’s where you really need to pay attention. All lenders require you to properly document the gift funds. Don’t just accept money from someone and think you can use it for your loan. You must follow the proper steps, which first includes a gift letter.

The gift letter should be from the donor. It should state all of the following:

  • The amount of the gift
  • The reason for the gift (buy a home)
  • The property address
  • A statement that this is not a loan and no repayment is expected
  • Signed and dated by the donor

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Once you have the gift letter, the donor can transfer the funds to you. They should transfer the funds in a way that the lender can track, such as via check, electronic transfer, or wire transfer. The lender will need to see the funds leave the donor’s account and get deposited into your account. You can provide the deposit ticket or your asset statement showing the deposit.

In some cases, lenders need to track the funds provided by the donor. In other words, they need to see where the donor got the funds, to ensure there isn’t a loan in the works. If the donor sold an asset, received a windfall, or used his or her income, they should be able to document the origination of the funds.

Make sure you deposit the funds in the account you’ll use to fund the down payment and closing costs. Don’t combine accounts or use more than one account. Keep it simple from the start so that the lender can effectively transfer the funds.

Who Can’t Provide Gift Funds?

Something you should also note is who cannot give you gift funds. While the list is long regarding who can, it’s just as lengthy regarding who can’t help. Basically anyone that’s involved in the transaction can’t give gift funds. This includes the builder, seller, realtor, and lender. Anyone that has an interest in the transaction is ineligible.

This doesn’t mean the seller can’t help with the closing costs – he or she just cannot give any money for the down payment. When a seller helps with closing costs, it’s called a seller’s concession. The seller concedes some of his or her proceeds from the sale to help you with your loan costs.

Mortgage down payment funds must come from either you or an approved gift source. Lenders are very careful about who provides the down payment funds to make sure there isn’t any ‘bribing’ to buy the home. You should buy the home of your own free will and because you are financially capable of doing so. If that means getting gift funds for the down payment, it is possible, you just have to follow the rules.

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