How to Buy a House With Low Income

Can I Buy a Home With Low Income?

You may be able to buy a home with a low income, but it depends on the entirety of your financial situation. If you can pay cash, for example, your income won’t be a factor in the purchase—but most buyers aren’t able to pay cash for a home.

When you’re taking out a home loan, the lender will look at several factors to determine your readiness to take on a mortgage, including your credit history and down payment amount. One factor closely related to your income is your debt-to-income ratio (DTI).

How Debt-to-Income Ratio for a Mortgage Works

When you apply for a mortgage, the lender might consider two DTIs, and your income will directly affect both of these.

• Front-end ratio: The front-end ratio is your gross monthly income (income before taxes and withholdings) compared to your mortgage-related expenses. These include your mortgage principal and interest payments, along with your property taxes and insurance—your PITI. You might pay all four of these expenses as part of your monthly mortgage payment.
• Back-end ratio: The back-end ratio is your gross monthly income compared to your mortgage-related expenses and your other loan payments. The other expenses might include your monthly auto, student and personal loan payments, plus the minimum payments for your credit cards.

There’s a general guideline that you want to keep your front-end ratio at or below 28% and the back-end ratio at or below 36%.

Example: If your gross monthly income is $4,000, your PITI payment would need to be $1,120 or lower to meet the 28% front-end ratio limit. And your other monthly debt payments couldn’t exceed $320 to keep the back-end ratio at 36%.

Keeping your monthly expenses in line with the 28/36 rule can help you avoid overspending on housing, but there are mortgages available with higher DTI limits

Additionally, remember that the DTI doesn’t consider your family situation, medical conditions or other potential financial responsibilities. Figuring out what’s possible and comfortable for your unique financial situation can be very subjective.

Learn more >> How Far Will Your Salary Get You When Buying a House?

Low-Income Home Loans

Lenders might not have a specific minimum income requirement—their focus is typically on DTI. Maximum allowable DTI can vary depending on the lender and type of mortgage loan, but here are some general maximum back-end ratios for different types of mortgage loans:

• NACA mortgages—43%: The Neighborhood Assistance Corporation of America (NACA) is a nonprofit that helps people buy homes. The organization offers mortgages that don’t require a down payment, closing costs, fees, mortgage insurance or credit score. The back-end DTI limit is often 40%, but could be increased to 43% in areas that have higher housing costs. NACA mortgages also offer below-market interest rates, which could make meeting the DTI limits easier.
• FHA loans—57%: Government-backed FHA loans from the Federal Housing Administration can be a good option for first-time homebuyers who don’t have a good FICO Score or a lot of money for a down payment. The maximum DTI for an FHA loan could be 57%, although some lenders have a lower limit.
• USDA loans—44%: The U.S. Department of Agriculture issues several types of government-backed USDA loans, with maximum back-end ratios of 41%, or 44% in limited cases. The USDA direct loan program is specifically for low-income households. The loans can have a low interest rate (as low as 1% with payment assistance) and long repayment period, which results in a lower monthly payment and DTI than you’d have with other types of mortgages. USDA loans also don’t require a down payment, but you’ll need to purchase an eligible home in a rural area.
• VA loans—N/A: Government-backed VA loans from the Department of Veterans Affairs are available to eligible service members, veterans and their spouses. The VA suggests a DTI limit of 41% as a guideline, but the lenders that issue VA loans can choose to use a different limit.
• Conventional loans—50%: A conventional loan is a mortgage you get directly from a mortgage lender without going through a government program. Lenders might approve you with a DTI ratio as high as 50%.
• Seller-financed loans—N/A: Sometimes, the current homeowners will finance your purchase, and the sellers can choose their own DTI limits.

Although these could represent the maximum DTI allowed for a particular type of mortgage, the maximum DTI you’re allowed as an individual borrower can depend on the entirety of your application.

For example, you might have an easier time getting approved with a higher DTI if you also have an excellent credit score and make a large down payment. Or, if you show that your income is likely to increase or expenses are likely to decrease soon.

Learn more >> How to Get Down Payment Assistance

Low-Income Homebuyer Programs

Some down payment and homebuyer assistance programs are only available to low-income buyers or first-time homebuyers. The programs may offer different benefits, including:

• Reduced rates and insurance costs: Some mortgages might offer a low interest rate and don’t require, or reduce the cost of, mortgage insurance.
• Low-cost secondary loans: You might receive a low- or no-interest loan that you can use for your down payment, closing costs and other eligible expenses. Sometimes, you don’t need to repay the loan until you sell your home or refinance your mortgage.
• Grants: You might receive grants—which don’t need to be repaid—that you can use to purchase, repair or improve a home.
• Discounted home prices: Some programs will subsidize the cost of the home or offer below-market-rate homes to eligible buyers.

These types of programs can reduce your monthly housing costs by decreasing how much you need to borrow or lowering the cost of the loan. Either way, a lower PITI could help you meet the lender’s DTI requirements.

Learn more >> First-Time Homebuyer Loans, Programs and Grants

How to Buy a House With Low Income

You can take several steps to prepare and try to buy a home with a low income.

1. Calculate Your Back-End DTI

Start by calculating your back-end DTI ratios without including your housing costs.

For example, if you make $3,000 a month and spend $800 a month on student loans, an auto loan and minimum credit card payments, your back-end ratio is at 27% before including your housing costs.

From there, you can figure out how your new mortgage-related expenses will impact your DTI. Building off the example, you’d only have $280 to spend on PITI each month if you want to stick to the 28/36 rule. Or, if you increase the back-end ratio to 50%, you could spend up to $700 on mortgage-related expenses.

2. Estimate Your Maximum Loan Amount

Once you’ve narrowed in on a range for your monthly PITI, you can use a mortgage calculator to estimate how much you can borrow. The exact amount could depend on the interest rate, tax rates and insurance premiums—and whether the home is part of a homeowners association (HOA).

You can use this approach to roughly determine your maximum loan amount. The total house price will be higher than the maximum loan amount because you want to budget at least 3% to 5% of the home’s price for your down payment, and 2% to 5% for closing costs. But these costs can also depend on whether you get approved for any assistance programs.

Also be sure to consider if your savings and income will cover the non-mortgage expenses that come with homeownership, such as:

• Property taxes
• Insurance
• Maintenance

Learn more >> How Much House Can I Afford?

3. Find an Experienced Real Estate Agent

With your budget in hand, start interviewing real estate agents. Try to find someone who has worked with low-income buyers before and is familiar with the areas where you want to buy.

Ideally, the agent can help you narrow in on specific neighborhoods or blocks that will have homes in your budget. And they can tell you about local, state and federal programs for low-income buyers.

The agent also might be able to recommend a loan broker or mortgage lender who has experience with low-income buyers.

4. Get Preapproved for a Mortgage

Shop around and get preapproved with several brokers and lenders to see who offers you the best terms. The process can require agreeing to a credit check and uploading documents to verify your identity, income and assets.

Getting preapproved can give you a more accurate estimate of how much you can borrow and how much your payments will be. The lender can also give you a preapproval letter, which you can include in your home offers to make them more competitive—because sellers can feel reassured that you’ll likely get approved for the loan.

Learn more >> Which Credit Scores Do Mortgage Lenders Use?

5. Make an Offer

Once you have your budget and your team—your real estate agent and lender—ready, you can start looking for a home that you like and can afford. The process and options can depend on where you want to buy, the type of mortgage you plan on using and whether you’re also applying for assistance programs.

Learn more >> A Step-by-Step Guide to Homeownership

Check and Improve Your Credit While House Hunting

Your credit scores can affect your eligibility for a mortgage, the rate you receive and how much you need to put down. Improving your credit could make buying a home easier and less expensive, and your income doesn’t affect your credit scores. Get your FICO Score and credit report for free from Experian, and you’ll also receive ongoing score and report monitoring. You can also use your account to understand what’s affecting your credit score the most and find tips on how to improve your score.