The Keys to Buying A House With Low Income

Homeownership is the American Dream. But what if you earn a low income? Is buying a house with low income even attainable?

You bet it is. Though your income certainly plays a role, it isn’t the only factor that affects buying a home. And there are several home loan and down payment assistance programs designed to help creditworthy people become homeowners.

Owning a home can help you build wealth, provide housing stability for your family, and offer other significant benefits, so don’t count yourself out just because of your salary — whatever it may be.

Buying a house with low income is achievable — and this guide will show you how to do it.

Buying a house with low income: What you need to know

Low-income buyers may face some headwinds when buying a home, particularly if you’re in a popular area where housing prices are rising fast.

But keep in mind: mortgage lenders don’t just consider your income. They look at several factors, including:

• Your credit score
• Credit history
• Debt-to-income ratio (DTI)

Credit score

You don’t need high income to have good credit. Paying your bills on time and keeping credit card balances low contributes to a high score and makes you a stronger candidate in your mortgage lender’s eyes.

Lenders also look at your credit history, including whether you make timely payments, whether your accounts have gone to collections, and whether you’ve ever been through a foreclosure or bankruptcy.

You can earn low income and still have an excellent credit score if you’re a model borrower when it comes to making payments and not maxing out your credit cards.

Credit history

Lots of people have low credit scores, and they’re all along the income spectrum. Someone who earns six figures a year can still have their accounts end up in collections if they struggle to pay their debts or have a sudden loss of income. Same for foreclosure and bankruptcies. Life happens, and it doesn’t discriminate based on salary.

If you’ve fallen behind on payments in the past, been foreclosed on, or had to file bankruptcy, it’s OK. You can still buy another home. Your lender may ask for a letter of explanation about why those happened and why they’re unlikely to occur in the future.

If the foreclosure or bankruptcy happened less than a year ago, you’ll likely have to wait until a year or more passes before qualifying for a new home loan. But if those happened a few years ago, your finances are stable now, and you qualify, you can provide the necessary documentation requested from your lender to proceed with home loan financing.”

Debt-to-income ratio (DTI)

DTI represents your total monthly debt payments as a percentage of your income. Particularly when you are a low-income or moderate-income borrower, getting your DTI as low as possible can help you qualify for a mortgage. Your lender’s concern is that you can afford your mortgage payments, so the less non-housing debt you owe, the stronger a borrower you’ll be.

The maximum DTI allowed varies based on the type of loan you want to use to buy your home. Generally speaking, conventional loans may require a DTI of 45% or less. The maximum for FHA loans is typically 50%, though lenders can approve borrowers with higher ratios in some cases.

VA and USDA loans follow the automated underwriting response for DTI and both agencies allow lenders to use their discretion when approving borrowers. That means that if your DTI is high, but you have steady income and good credit, you may still be approved. It really depends on your overall financial picture and your lender’s criteria.

If your DTI is on the high end, you can greatly improve your chances of getting a mortgage by reducing it — meaning paying down your debts or credit card balances. This frees up cash for your monthly payment and makes you seem safer to lenders. 

Tips for qualifying for a home loan

 Here are some other steps you can take to improve your shot at buying a home and getting a mortgage — regardless of your income level:

Improve your credit score

“One of the easiest ways to improve your chance of homeownership is to take control of your credit score,” said R.J. Weiss, a certified financial planner and founder of the personal finance site The Ways to Wealth. To improve your score, Weiss said it’s important to never miss a payment. Consider setting up autopay on your bills just to be safe. You can also ask for a credit limit increase on your credit cards — just don’t use it. Keeping your balances low, especially on high-limit cards, improves your credit utilization ratio (how much of your cards and credit lines you’re using). Aim to keep your balance at 30% or less of the card’s available limit.

Saving for a down payment

The larger your down payment, the easier it is to qualify for a mortgage — and you’ll likely get better interest rates, too. Consider setting up auto deposits to pad your savings on a monthly basis. You might also look into automatic savings apps that help you save money with each purchase by rounding up your purchase amounts and transferring the difference into your savings account.

Reduce your expenses

Map out all your monthly expenses, and look for ways to reduce your costs. If you can free up some extra cash, you can either increase your down payment savings or start paying down debts. Either way, it will help your chances of getting a loan.

Loan programs for homebuyers of all incomes

There are a number of home purchase loan programs out there. It’s just a matter of finding the right one for you. Some are specifically designed to help lower income earners buy homes, while others are available to all eligible homebuyers.

Conventional loans

Conventional loans have a reputation that they are only available to high-income, high-credit borrowers. But that’s not true.

Anyone with a 620+ credit score can qualify if they meet debt-to-income requirements.

There are multiple conventional loan programs that require just 3-5% down, so you don’t even need a ton of money in the bank to get an approval.

So don’t be surprised if you qualify for conventional financing when you apply to buy a home.

Apply now to see how much home you can afford.

USDA loans

USDA loans are 0% down mortgages that can be used to buy single-family homes, condos, and manufactured homes in designated rural and suburban communities. You can also use a USDA loan to buy a fixer-upper or buy land on which to build a house.

The U.S. Department of Agriculture (USDA) insures these loans, and it created the program to help very low- to moderate-income homebuyers specifically. Therefore, you must meet the income limits in your area to qualify.

Lenders will calculate your eligibility based on three factors:

• Qualifying income, to determine whether you as the borrower can afford the monthly mortgage payment
• Eligibility income, to determine whether your household income is at or below limits
• Adjusted eligibility income, which is your household income after deductions for minor children, childcare expenses, dependent adults, and allowed medical expenses

You don’t have to figure out your eligibility on your own, though. A USDA lender will calculate your income and help you determine whether you are buying a home in a USDA-eligible area.

Talk to a lender about whether a 0% down USDA loan is an option for you.

Related reading: USDA Loans: A Zero-Down Loan For The Suburbs

VA loans

VA loans, which are insured by the Department of Veterans Affairs, offer another 0% down mortgage option*, though 100% financing is only available to veterans and active-duty servicemembers who have full entitlement benefit available. Some surviving spouses may be eligible as well.

Servicemembers and veterans who have partial benefit available may be able to buy with 0% down, or they may be able to use a VA loan with a down payment.

VA loans have an upfront funding fee, charged as a percentage of their loan amount. But there is no annual mortgage insurance fee, and borrowers who have a service-related disability may be exempt from paying the funding fee.

Related reading: Absolutely Everything to Know About the VA Home Loan

FHA loans

FHA loans, backed by the Federal Housing Administration, are low down payment loans that allow borrowers with credit scores of 580 or higher to buy homes with 3.5% down. Borrowers may qualify with scores of 500-579 with a 10% down payment.

FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount. That’s a one-time fee of $3,500 on a $200,000 loan, and can be wrapped into the loan amount. Monthly mortgage insurance is also required. Most FHA buyers pay 0.85% per year, paid in 12 equal installments with each mortgage payment. That’s about $142 per month on a loan amount of $200,000.

Learn more about FHA loan requirements and fees here. 

Fannie Mae HomeReady

The Fannie Mae HomeReady program is a 3% home loan option that can be attractive to low-income borrowers for a few reasons.

For one thing, HomeReady was designed to help low- and moderate-income earners become homeowners. To be eligible for this loan product, your income must be at or below 80% of your area’s median income.

Here’s another HomeReady perk: You can use gift funds or funds from a down payment assistance program toward your down payment.

Freddie Mac Home Possible

The Freddie Mac Home Possible program is similar to Fannie Mae’s HomeReady: 3% down payment requirement, your income must be at or below 80% of the area median income, and the down payment can come from a gift. You can also use roommate rent toward your qualifying income.

The big difference between Home Possible and HomeReady is that you can use sweat equity toward your down payment. That means you may be able to make DIY renovations on the home, and have your labor and improvements count toward your 3% down, reducing the cash you need upfront.

Learn more: Top 12 No Down Payment Mortgages for 2021

Freddie Mac also offers the HomeOne program, which is another 3% down payment option. It is geared toward first-time homebuyers, and anyone on the loan who has never owned a home must complete a homebuyer education course before their loan can close. The course takes roughly two hours to complete and can be taken online.

Good Neighbor Next Door program

If you’re a police officer, firefighter, K-12 teacher, or an EMT, you could qualify for the Good Neighbor Next Door program.

Eligible borrowers can buy certain homes at 50% off their list price through this program, though the homes must be approved by the U.S. Department of Housing and Urban Development (HUD) and are only in FHA-designated revitalization areas. You can find these homes through the HUD Home Store.

Freddie Mac BorrowSmart℠

The Freddie Mac BorrowSmart℠ program assists lower income buyers with up to $2,500 in down payment assistance. Buyers who make at or below 50% of their area’s median income may qualify for this benefit. Those who make between 51-100% of their area’s median income may receive $1,000 in assistance in some cases.

Habitat for Humanity mortgage

If you’re willing to put in a little elbow grease, you could be eligible for a Habitat for Humanity home. This requires you to put in sweat equity, either by helping to build your home alongside volunteers or working in a Habitat for Humanity office or store. You also must be able to pay an affordable mortgage on the property.

The funds from your mortgage are then used to build additional Habitat for Humanity homes for those in need. Here’s how to apply for these properties.

Down payment assistance

Down payment assistance programs exist at the federal, state, and local levels to help low- and moderate-income families and individual borrowers purchase homes. Typically offered as a grant or a 0% interest, forgivable second mortgage, down payment assistance can reduce or eliminate one of the biggest hurdles to homeownership — coming up with thousands of dollars upfront.

You can look up programs in your state through the Department of Housing and Urban Development’s (HUD) website.**

But make sure to look for local assistance options as well. Google “down payment assistance programs in [enter your city, state, and county here].” Ask your lender and real estate for recommendations as well.

And more down payment help could be on the way. The Biden administration has proposed various measures to assist first-generation homebuyers and other disadvantaged buyers. One program aims to offer a $15,000 tax credit for first-time homebuyers, while another would provide $25,000 to eligible first-generation, first-time buyers. Both bills are still working their way through Congress and have not yet been finalized.

Other paths to homeownership

Look for a cosigner

If you’re not able to qualify for a mortgage program on your own, you can add a cosigner to your loan, which essentially means someone who shares the responsibility of the loan with you. Their credit score and other financial details will be considered when evaluating your loan application, and if you fall behind on your payments, they’ll be responsible for keeping the account current.

Be thoughtful about who you ask to cosign. They should be someone you trust and who you know has solid finances, but also someone who understands the commitment they’re making.

“Adding a cosigner to your home loan has its pros and cons. First, you're increasing your creditworthiness, and therefore, can qualify for better terms,” Weiss said. “However, this person will be legally obligated to pay off your mortgage if you cannot do so. So, it can come with great risk for both you and the co-signer.”

If you have a cosigner, talk about how you will handle potential payment issues or setbacks. Money can complicate relationships, so the more transparent and communicative you are before taking out the loan, the less likely it is for friction to arise.

Housing Choice Voucher (HCV) Homeowners

The federal government’s Housing Choice Voucher Homeowners program is another homebuying option. It falls under the Section 8 affordable housing program. 

“The Housing Choice Voucher Homeownership Program is a federally funded program that allows families with a Housing Choice Voucher (HCV) that are enrolled in the Family Self-Sufficiency Program to purchase a home, rather than rent,” explained William S. Matthews, a Houston-based real estate agent and investor. “Participants in the program have the opportunity to enroll in a homeownership program, meet with a financial coach, and save for down payment/closing costs since a large portion of their rent is being subsidized by HUD.”

If you think you might qualify for the HCV Homeowners program, talk with your local housing authority as soon as you’re ready to buy. “Depending on your area, there could be a backlog waiting list for this program,” Matthews said.

Additionally, the HCV Homeowners option may not be available in all cities.

Homebuyer education and counseling

Undergoing credit or housing counseling can help ease the homebuying process, too. In some cases, your loan program may actually require it.

“Homebuyer and homeownership education is a critical resource for anyone buying or owning a home, but it’s particularly helpful for first-time, first-generation, or low-income individuals to understand all of the options available to them,” said Danielle Samalin, CEO of Framework Homeownership, a HUD-approved counseling agency. “You don’t know what you don’t know, and homebuyer and homeownership education give you the information you need to decide what’s right for your journey.”

HUD housing counselors can help with budgeting, answer any questions you may have, and connect you with important resources, such as down payment assistance or affordable loan programs in your area. Counseling is often available via online courses, one-on-one in-person discussions, and more.

“There are HUD-approved housing counseling agencies nationwide that offer free or low-cost services in multiple languages,” Samalin said. “If you are considering buying a home and unsure of what might be accessible to you, speaking with a housing counselor can be a great place to start. The complexity of the homebuying process and proliferation of false or biased information can sometimes make people think they are unable to become homeowners.”

 HUD counselors can also help you after you’ve purchased your home. They can help you understand the terms of your mortgage, apply for mortgage relief, and communicate with your mortgage servicer. To find a housing counseling agency in your area, see HUD’s web directory.

Buying a house with low income FAQs

Homeownership for all

While it’s true that buying a house is a big expense, this goal is within reach for earners across the income spectrum. If you’re ready to buy a home, the next step is to get preapproved with a lender. They will tell you how much you can afford in a home and which home loan programs may be right for you.

Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.

*A down payment is required if the borrower does not have full VA entitlement or when the loan amount exceeds the VA county limits. **Eligibility subject to program stipulations, qualifying factors, applicable income and debt-to-income (DTI) restrictions, and property limits.