How To Buy a House With Low Income and Bad Credit
October 19, 2022
Buying a house is an expensive endeavor and for those with a low income or not a lot of money saved, it can be extremely difficult to make the purchase. The down payment is the largest upfront cost in buying a house but outside of that, there are many other costs associated with becoming a homeowner.
Having a low income does not mean that you can’t buy a house. The mortgage options and assistance programs available make homeownership possible for almost anyone as long as you can qualify for a mortgage. Here are a few tips on how to buy a house with low income and bad credit.
Buying a Home With Low Income and Bad Credit
The biggest hurdle for low-income buyers to purchase a home is with getting a mortgage. Mortgage lenders require many different factors when approving a loan but the two biggest considerations are credit score and income. If you don’t have a strong credit score, it shows lenders that you may not be the most reliable borrower and are more likely to default on your loan.
A low income makes it difficult to qualify for a loan because lenders want to see that your finances can cover the monthly mortgage payments and any other costs that come with homeownership. However, there are mortgage options that are specifically available for low-income earners and even for people who have a lower credit score.
Federal Housing Agency or FHA Loans
The Federal Housing Administration is a government organization that works to insure mortgage loans provided by lenders and banks that have been approved by the FHA. FHA loans were made for moderate to low-income earners to be able to afford a house and qualify for a mortgage. FHA loans have lower requirements when it comes to credit scores and income.
FHA interest rates are usually competitive when compared to conventional loans. According to Rocket Mortgage, the current 30-year fixed conventional loan interest rate is 6.99% while the FHA loan interest rate is 6.49%. A specific type of income is not required for an FHA loan. Instead, they require proof that you have any means of a steady income through pay stubs, W2s, or bank statements.
Credit Score and Down Payment Qualifications For FHA Loans
A borrower’s credit score can be as low as 500 when it comes to qualifying for an FHA loan. However, the lower the credit score is the larger the down payment you’ll have to make. If your credit score is 580 or above, then borrowers can make a minimum down payment of 3.5%.
If your credit score is between 500 and 580, then you can make a minimum down payment of 10%. Also, the FHA checks more than just credit score when determining if you’re reliable enough to lend money to. They also check to see your history with payments, bankruptcies, and foreclosures.
The FHA website recommends having a debt-to-income ratio that is below 43%. You can find your debt-to-income ratio by adding up your monthly bills and dividing them by your monthly income before taxes are taken out.
A debt-to-income ratio is another way lenders look at whether or not you’re a good candidate for a loan. The higher your credit score, the higher your debt-to-income ratio can be with a maximum of 57%.
Requirements For an FHA Loan
Credit scores and down payments aren’t the only things that the FHA looks at when approving a borrower for a loan. There are other considerations that the FHA looks at when determining if you’re a good candidate for an FHA loan. Here are a few of the requirements to get an FHA loan.
- Need a constant stream of income and proof of employment.
- The house has to be a primary residence (the main place you will be living).
- FHA loans require a mortgage insurance premium which results in an extra annual fee that is added to your monthly mortgage payment.
Veterans Affairs or VA Loans
VA loans are offered by lenders who are working with the Department of Veterans Affairs to provide active or retired military personnel with a home loan. In order to qualify for VA loans, you have to verify your military service, employment history, and get a Certificate of Eligibility. VA loans have some of the most stringent requirements of any type of home loan but also some of the best benefits.
Credit Score and Down Payment Qualifications For VA Loans
Unlike FHA loans, the VA does not have a minimum credit score requirement. However, private lenders will have a credit score requirement that varies depending on the company you’re working with. VA loans were designed for military borrowers with financial difficulties so there are many flexibilities that the mortgage loan has for borrowers.
Borrowers Without Credit History. If a military borrower does not have enough credit payment history in order to have a solid credit score, then lenders can look at other forms of payment (like car insurance or rent) to make their decision.
Waiting Period After Foreclosure. Borrowers who have a previously foreclosed home will be eligible for a VA loan in 2 years. Conventional loans have a waiting period of 7 years.
Chapter 7 Bankruptcy. Military borrowers must wait 2 years to apply for a VA loan after getting a Chapter 7 bankruptcy.
Residual Income. The free money that a borrower has after paying fees is called residual income. If you have a lot of residual income, then you may qualify for a VA loan even with bad credit.
Chapter 13 Bankruptcy or Credit Counseling. If you are a VA borrower and have made 12 monthly payments on time as part of either a Chapter 13 bankruptcy or credit counseling program, you may qualify for a new VA loan.
Requirements For a VA Loan
VA loans have requirements when it comes to financial health and also for military service served. Similar to credit score qualifications, there are many requirements that are determined by the lender like income and debt-to-income ratio. But, there are requirements set by the VA for all VA loans.
- The property has to meet the VA’s minimum requirements and has to be appraised by a VA-approved professional.
- Borrowers need to get a COE (Certificate of Eligibility) from the VA to prove to lenders that they are eligible for a VA loan.
- 90 days of active military service.
Learn more about the eligibility requirements on the VA website.
United States Department of Agriculture or USDA Loans
The USDA works with participating lenders to provide mortgage loans to low-income earners in rural areas. There is also a USDA program that directly provides mortgage loans to eligible home buyers. USDA loans typically have a low-interest rate and require no down payment.
Credit Score and Down Payment Qualifications For USDA Loans
For USDA loans, lenders typically require a credit score of at least 640. However, there is still a way to get a USDA loan with a lower credit score.
A lender can manually underwrite your USDA application instead of automating the process which allows borrowers to be able to have a credit score that is lower than usual as long as they meet the other USDA qualifications. A lower credit score means that the borrower will have to compensate in another area like a higher down payment or higher income, for example.
Requirements For a USDA Loan
The biggest eligibility factor for USDA loans is your location. USDA loans are only available in select rural areas. The property also has to be the main residence, have direct access to a street, driveway, or road, and have the necessary utilities.
Your adjusted gross income cannot be over 115% of the median income in the area. This is to demonstrate financial need. You also need to have proof of a steady income to qualify. Here are a few other requirements.
- No More than 41% of DTI
- USDA income limits of $103,500 for households with 1 to 4 people and $136,600 for households with 5 to 8 people.
Down Payment Assistance Options
The down payment is the biggest obstacle for most home buyers, especially those with a low income. In case you can’t qualify for a home loan that requires a lower down payment, there are many programs that offer down payment assistance to help make homeownership possible. Here are just a few of the down payment assistance options available.
Grants are programs that provide money that doesn’t need to be repaid. Most down payment assistance programs are some type of grant. Make sure the lender is aware that you have a grant. If they don’t know, you may end up with a silent second mortgage.
Forgivable loans are second mortgages used for the down payment and sometimes closing costs. The loans don’t need to be repaid as long as the borrower lives in the bought property for years, frequently 5, 10, or 20 years. If you refinance your main mortgage or move earlier than the required number of years, then you’ll have to repay the loans.
Loans With Deferred Payment
These loans are not forgiven and do need to be repaid. Deferred payment loans are given to the borrower to cover the down payment. They don’t need to be repaid until you move, refinance, or sell your house.
Work With a Great Real Estate Agent When Buying a House
Homeownership is one thing but the home-buying process is a whole other animal. There are a lot of steps involved when buying a house.
From searching diligently for the right house for you to negotiating with the seller’s agent about the terms of the real estate contract, the process can take up a lot of energy and time.
Working with a good real estate agent is essential for home buyers because of their vast experience in real estate and their commitment to take on the headache of the home buying process so that you don’t have to.
However, not all real estate agents are good at what they do. Luckily, we have created a real estate organization that streamlines your search for a high-quality real estate agent otherwise known as a Negotiator.
Negotiators are top real estate agents who have proven themselves top performers in their local real estate markets. Contact a Negotiator if you want to work with a great real estate agent.