How to buy a house with a low income

If you have a stable job but earn less than you’d like, you might be concerned this can prevent you from purchasing a home. But there’s good news: Mortgage assistance options can help you buy a house even with a low income.

Can I buy a house with a low income?

The short answer: Yes, you can buy a house with a low income, thanks to mortgage programs designed for lower- to moderate-income borrowers.

“Having a low income can increase your debt-to-income (DTI) ratio. This limits some of the loan program options you may be eligible for, but it does not mean you absolutely cannot buy a home,” says Balenda Hetzel, regional vice president with CrossCountry Mortgage, headquartered in Cleveland, Ohio.

How to buy a house with low income: Mortgage programs and assistance

HomeReady mortgage

​​Fannie Mae’s HomeReady mortgage program addresses one of the challenges of buying a home with a low income by requiring just 3 percent as a down payment. With this loan, your down payment and closing cost funds can come from other sources beyond savings, including grants and gifts, and you don’t need to contribute any of the money personally.

To qualify, your income can’t exceed 80 percent of the area median income (AMI) for the location where you’re buying a home. (You can look up local limits using Fannie Mae’s tool.)

While you can put down as little as 3 percent with a HomeReady mortgage, you’ll need to pay for private mortgage insurance (PMI). However, you can cancel PMI once you attain 20 percent equity in your home. You’ll pay the mortgage insurance with your monthly mortgage payment, which will add to that cost, but it’s easy to get out of once you hit that 20 percent.

In addition, you can add a co-borrower to a HomeReady mortgage, even if that person isn’t planning on living in the home.

“Unlike other home loans, all borrowers do not have to reside in the property,” says Roselina D’Annucci, a New York-based real estate attorney with the Law Offices of Serrano and Associates, P.C. “For example, parents who won’t be living in the home can be co-borrowers on the loan to help their children qualify for a mortgage.”

With a HomeReady mortgage, your mortgage lender can also consider your rent payment history to help qualify you for the loan, says D’Annucci.

Home Possible and HomeOne mortgages

Like a HomeReady mortgage, Freddie Mac’s Home Possible and HomeOne mortgages require just 3 percent down. The down payment funds can come from many sources, including family members, employer-assistance programs and even sweat equity (if you have the skills to provide labor or materials to renovate the home, that is).

Unlike HomeReady, a Home Possible mortgage does not have income or geographic requirements to qualify. But you will need to pay for mortgage insurance if you put down less than 5 percent.

“There are a few other strings attached, too: If you are a first-time buyer, you will be required to go through a homeownership education program,” says Tabitha Mazzara, director of Operations at MBANC, a mortgage lender.

The first-time buyer class requirement also applies to the HomeReady program.

FHA loan

You can get an FHA loan, which is insured by the Federal Housing Administration, for as little as 3.5 percent down if your credit score is 580 or higher.

“This loan has less stringent requirements that can help low-income borrowers or those with poor credit histories,” says Gerwin Wallace, a mortgage loan originator with Silverton Mortgage in Anniston, Alabama. “You may pay lower closing costs with this loan, as well.”

If your down payment is less than 10 percent, however, FHA loans come with lifetime mortgage insurance (in other words, it can’t be canceled), which can be a drawback. The home you want to buy must also pass an appraisal to ensure it meets FHA safety guidelines.

VA loan

Possibly the most generous way to buy a house with a low income is a VA loan, which is available to active-duty service members, veterans and surviving spouses. With a VA loan, you don’t have to put any money down or pay for mortgage insurance, the closing costs can be less than what other loans might charge and you could get a lower interest rate than you would with other financing options.

In addition, the VA loan is a lifetime benefit; that means if you’re eligible, you can get a VA loan multiple times.

However, you’ll need to pay a funding fee for this mortgage, the amount of which depends on whether you’ve gotten a VA loan before and how much down payment you’re making, if any. This is an additional cost to consider.

To qualify for a VA loan, “You must have good credit, a steady income and a Certificate of Eligibility from the VA,” says Mazzara. “Also, your loan amount must not exceed the appraised value of the house.”

USDA loan

Another generous mortgage program is the USDA loan, which, like the VA loan, requires no money down. You don’t have to be a first-time buyer to get a USDA loan, either.

However, the home must be located in an eligible rural area, which means you might only qualify if you’re buying far from a city — although many suburban areas are also eligible for USDA financing, according to Wallace.

Also, your income can’t exceed 115 percent of the AMI, and you’ll pay mortgage insurance with this loan, too, in the form of an upfront guarantee fee and then annual fees.

Good Neighbor Next Door program

Good Neighbor Next Door is a homebuying program available to law enforcement officers, teachers, firefighters and emergency medical technicians. The program, administered by the U.S. Department of Housing and Urban Development (HUD), allows borrowers to buy a home for 50 percent off list price in exchange for living in the property for at least three years.

However, the home has to be a property in a HUD-determined “revitalization area” and listed for sale through the program, and the listings are only available for purchase for seven days. You’ll also need to get a second mortgage and note to qualify for the discount — but you won’t be on the hook for the second mortgage or any interest on it, so long as you fulfill the three-year residency requirement.

HFA loan

Not to be confused with an FHA loan, an HFA loan is another type of low-income mortgage through Fannie Mae (called “HFA Preferred”) and Freddie Mac (called “HFA Advantage”) that requires only 3 percent down. HFA loans are available through state housing finance agencies (HFAs), which partner with mortgage lenders to offer affordable loans to low-income borrowers. In many cases, you don’t have to be a first-time buyer to qualify, and you might get down payment assistance, as well.

Down payment assistance programs

There are a variety of down payment assistance (DPA) programs, and they are typically geared toward lower- to moderate-income borrowers. These programs usually come in the form of a grant (free money) or loan, the latter of which might need to be repaid or could be eligible for forgiveness after a certain time.

Mortgage credit certificate

A mortgage credit certificate (MCC) is a federal tax credit that can help low- and moderate-income or first-time buyers offset some of the money they owe in mortgage interest. Unlike a tax deduction, MCCs offer a dollar-for-dollar tax credit of up to $2,000 to those eligible annually. An MCC isn’t free, however, so if you qualify, consult with a tax professional to learn if this is the right move for you. Often, the savings over a 30-year mortgage exceed the upfront fee.

Manufactured and mobile home loans

Interested in a manufactured or mobile home? There is special financing for this property type that can be ideal for lower-income borrowers.

“For example, MH Advantage is a Fannie Mae loan program designed to finance manufactured homes,” says Wallace. “It features low-down payment options, low monthly payments and reduced interest rates compared to most standard loans for manufactured homes. Also, it offers the ability to combine HomeReady, HFA Preferred mortgage and other mortgage programs without being tied to any one specific program.”

How to qualify for a low-income mortgage

Some tips that can improve your odds of qualifying for a low-income mortgage include:

• Check your credit score and take steps to improve it. The higher your credit score, the better loan offers you’ll get. “I advise prospective buyers to get their credit score and credit reports whipped into good shape,” says Mazzara. “That way, you’ll be eligible for loans with lower interest rates.” Ways to improve your credit score include paying down your credit card and revolving debt balances, paying bills on time, correcting any errors on your credit reports and not opening any new credit accounts or lines of credit in the weeks before you apply for a mortgage, says Wallace.
• Research home loan programs designed specifically for lower-income applicants. Investigate every avenue for affordable mortgages and see which option would work best for you. For example, check out VA loans if you or your spouse has served in the armed forces. A USDA loan might be a great fit if you are willing to relocate to an eligible rural area.
• Meet with loan officers early on to learn how to optimize your loan application. “Also, meet with a trusted mortgage lender who can give you a better understanding of what you qualify for and what is needed for a loan,” says Hetzel. “Meeting with a lender early in the process allows you to work on improving your credit and saving up the funds needed for closing.”
• Get preapproved so you know your budget. Your lender will also help you obtain a loan preapproval for a specific amount. That way, when you’re ready to start searching for homes, you’ll have already completed most of the work to secure your financing and can show sellers a bona fide offer.