How to buy a house on a low income
We’ll cover how to improve your credit score, lower your DTI ratio, make a large down payment, use a cosigner, and research homeownership programs in the next few paragraphs.
Here’s how to buy a low-income home.
Improve your credit score
Have a high credit score can make it easier for you to get approved for a mortgage if you have a low income.
But first, what is a credit score? Your credit score is a three-digit number that indicates how well you are paying off your debts. Credit scores range from 300 (poor) to 850 (excellent). If you need to boost your credit score, you can do so in several ways. Let’s take a look:
- Don’t miss the payments: Your payment history affects your credit score. From now on, do your best to stick to the constant habit of making every payment on time. Setting up automatic payments can help ensure that you never miss a payment, whether it’s to your landlord or your utility company.
- Anticipate overdue accounts: If you’re a little behind on making payments to a particular creditor, catch up to improve your credit score. Talk to your creditor to work out a payment plan to catch up and avoid further late fees, if necessary. You may want to speak with a credit counselor to bring all of your old accounts online.
- Limit requests for new credit: Every time you apply for new credit, your credit gets a little shaken. Credit applications are difficult applications, which affect your credit the most.
Reduce your DTI ratio
lower your debt to income ratio can make mortgage approval easier for low-income homebuyers. DTI refers to a comparison of your monthly debt payments against your monthly gross income, expressed as a percentage. You can calculate it by adding up your minimum monthly payments and dividing that amount by your gross monthly income. Then multiply that amount by 100.
You will want to shoot for the lowest possible DTI ratio. Some types of loans require a certain DTI. (We’ll go into more detail about these types of loans later in the article.)
- FHA Loans: Maximum of 57% DTI
- USDA Loans: Less than 41% DTI
- VA Loans: Up to 60% in some cases
- Conventional loans: Typically a DTI of 50% or less
Make a big down payment
make a big advance payment can make it easier for a low-income homebuyer to get a mortgage approved. However, you may be thinking that making a big down payment might seem downright impossible.
Keep this in mind: very few lenders require a 20% down payment for a mortgage. But the bigger your down payment, the more likely you are to walk away with a lower interest rate, lower monthly payments and have a competitive advantage over other borrowers.
No down payment is available for government-backed lenders, such as VA or USDA loans. For these, you must find a lender that offers them, and you will need to meet other requirements set forth by the Department of Veterans Affairs and the United States Department of Agriculture.
Use a co-signer
A co-signer is someone who promises to take financial responsibility if you default on your loan. They can use their good credit rating to help you have a better chance of getting approved for a mortgage.
It is important for a co-signer to understand what he is agreeing to. They assume financial responsibility in the event of default, without access to the deed. Becoming a co-signer may involve more risk than they are willing to assume.
Research homeownership programs
Home ownership programs can help first-time buyers buy a home. If you’re buying a home for the first time, it’s a good idea to take a look at the options available in your state. For example, there are grants or loans for buying a first home and usually nationally and locally or through the private sector and non-profit organizations in your area.