How To Buy A House With A Low Income (2024)

How To Buy A Home With A Low Income In 9 Steps

A low income doesn’t have to come between you and homeownership. Let’s look at some steps and strategies you can apply to help you overcome any financial challenges.

1. Improve Your Credit Score

Mortgage lenders use your credit score and financial history to qualify you for a mortgage, so getting your credit in good shape before applying for financing is essential. The credit score you need to buy a house will depend on the type of loan you get. Conventional loans require a median FICO^® Score of 620 or higher, while Federal Housing Administration (FHA) loans require a minimum score of 580.

Buyers with poor credit can improve their credit score by making on-time bill payments, paying down debt and keeping their credit use as low as possible. A higher credit score can mean favorable loan terms, including lower interest rates.

2. Lower Your Debt-To-Income Ratio

Debt-to-income ratio (DTI) compares your total monthly debt to your gross monthly income. Aside from your credit score, your DTI ratio is one of the key factors mortgage lenders consider when determining your ability to repay a mortgage reliably. A lower DTI ratio indicates more available income in your budget to afford a monthly mortgage payment.

Paying off your existing debt will improve your credit score and lower your DTI – increasing your chances of loan approval.

3. Save For A Down Payment And Closing Costs

Your down payment and closing costs may be the largest upfront costs you’ll pay when purchasing a home. So you’ll need to start saving for closing costs and other home buying fees early.

Making the most of your money with smaller savings can be challenging, but there are options to help make homeownership more accessible. Many mortgage lenders offer flexible down payment requirements, including 3% down payments or putting no money down. You can also apply for extra financial assistance through down payment assistance (DPA) programs for low- to moderate-income and first-time home buyers.

4. Budget For The House

Creating and maintaining a budget is critical during the home buying process. While a lender can tell you how much money you qualify to borrow, the test of your ability to comfortably afford the mortgage will lie within your budget.

5. Research First-Time Home Buyer Assistance

If this is your first time buying a home, you may qualify for first-time home buyer programs and grants that help make homeownership more affordable, including:

Home buying assistance programs: Assistance programs can include closing cost or down payment assistance and Section 8 Housing Choice vouchers.
Government-backed loans: Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans benefit first-time home buyers with their flexible credit and down payment requirements, and in some cases, income requirements.
Tax credits: Many cities and states offer tax credit incentives that lower your tax bill. See if your city or state provides tax credits to home buyers in your area.

6. Consider A Co-Signer

If you want to buy a home sooner than it will take to improve your credit score, lower your DTI or increase your income, consider asking a friend or family member to co-sign your mortgage.

Because a lender will consider the co-signer’s financial and credit information along with yours, it can help bolster your chances of approval.

Being a co-signer is a serious responsibility. Your co-signer should understand that they’re legally obligated to repay the loan if you can no longer make the monthly payments.

7. Get Preapproved

A lender determines how much money you can afford to borrow when buying a house with a mortgage preapproval. Lenders will look at your credit score, DTI ratio and assets to estimate how much you qualify to borrow.

A preapproval estimates what a lender may allow you to borrow after meeting all their qualifications – it isn’t a formal loan offer. Once you find a home to purchase and move forward with the home loan, your preapproved interest rate is usually locked in. While the total loan amount and monthly mortgage payment may differ from the lender’s initial offer – your amounts should be in the same ballpark.

8. Search For Homes Using A Real Estate Agent

Working with a real estate agent or REALTOR^® familiar with affordable homes will take you far. A good real estate agent will direct you to homes that match your wants, needs and budget. They can help you navigate the buying process and provide valuable expertise, knowledge and support at every step.

9. Prepare For Moving Costs

Before you close on your new home, you should consider all the costs of moving. Your total bill will depend on several factors, including whether you hire a team of movers, rent a truck or ship your belongings.

HomeReady^® And Home Possible^® Mortgage

The HomeReady^® and Home Possible® mortgage programs – offered by Fannie Mae and Freddie Mac – are great options for home buyers interested in conventional mortgages.

Our friends at Rocket Mortgage® are also keenly aware of the challenges faced by home buyers in today's market of higher prices and elevated rates. To that end, they have a couple of offers designed to help.

Welcome Home RateBreak is a 2-1 temporary buydown that Rocket Mortgage will cover for clients.1 This means in the first year of your new mortgage, the rate would be 2% lower than your contract rate and 1% below the note rate in the second year before settling at the permanent rate in the third year.

Alternatively, you can take a credit of 1% of the loan amount upfront, up to $3,500. If the loan is below $200,000, the credit will be $2,000 as opposed to 1%. If your income is up to 50% of the area median, you may qualify for a $2,500 grant.

Both programs help low- to moderate-income borrowers purchase a home or refinance a mortgage. The mortgage programs offer flexible requirements, including 3% down payments and flexible mortgage insurance requirements.Check the specific requirements of the program you’re interested in because there are slight differences between the two.

FHA Loan

Another popular option is the FHA loan. The loan is guaranteed by the Federal Housing Administration, an agency within the Department of Housing and Urban Development (HUD). FHA loans offer less strict qualification requirements, which can help low-income borrowers or home buyers with poor credit histories qualify for a mortgage.

These loans are popular because they have lower credit score requirements, low down payment requirements and potentially lower closing costs. With a 580 credit score, you can put down as little as 3.5% with an FHA loan.

USDA Loan

USDA mortgages are backed by the U.S. Department of Agriculture (USDA) and assist low- to moderate-income households in rural areas. The USDA offers 100% financing through the Single Family Housing Guaranteed Loan Program, eliminating the need for a down payment.

Saving for a down payment is a common challenge many first-time home buyers face. By removing the hefty upfront cost, a USDA loan can help buyers interested in buying homes in certain rural and suburban areas realize their dream of homeownership.

Visit the USDA website to check a location’s eligibility.

VA Loan

Backed by the Department of Veteran Affairs, VA mortgages are offered to qualifying active-duty service members, veterans and military spouses. VA loans typically have less stringent credit and DTI requirements than other loans.

VA loans typically don’t require a down payment and can provide better loan terms, such as lower interest rates than conventional mortgages.

HFA Loan

A Housing Financing Agency (HFA) loan is a conventional mortgage for eligible home buyers with low to moderate incomes. You must work directly with your local housing finance agency or an approved lender within their network to apply for this loan.

If you qualify, the HFA or lender will guide you through the loan underwriting process.