We all have different aspirations in life. For instance, most people, if not everyone, aspires to own a home one day; however, if you’re a low-income earner, you may presume that your dream has been shattered. Fortunately, low-income earners can also purchase a home.
Before purchasing a house, you must evaluate all the available options, especially if you earn a low income. Below, we’ll look into how a low-income earner can buy a home.
Is it Possible to Purchase a Home with a Low Income?
With low income, it is possible to purchase a house; however, it is challenging. Different aspects of buying a home, such as lowering the DTI (debt-to-income) ratio and having a good credit score, can impact your overall financial outlook.
For low-income individuals, the available options when purchasing a home include USDA and FHA loans, and you should contrast and compare different programs and choose the one that suits your needs.
How to Purchase a Home with Low Income
You can acquire a home through fractional ownership. However, you’ll need a mortgage. Before looking into how you can improve your mortgage chances, let’s delve into fractional ownership first.
About Fractional Ownership
Fractional ownership is also referred to as shared ownership. This is an initiative for buyers who cannot afford property through monthly repayments and the initial deposit. The initiative involves purchasing a share of the property.
A first-time buyer can pay the mortgage on their share and rent to the housing association on their remaining share. The buyer needs a mortgage for the share they’re acquiring. The deposit amount required in this case is low compared to the amount you’re supposed to pay as you acquire the home outright.
As a buyer, you can increase your share during your stay at the property through a process known as staircasing; in most instances, the residents usually staircase up to 100%. It means the shared owner won’t pay rent anymore. Instead, they’ll only pay the mortgage, ground rent, and service charges.
We’ll now look into how you can improve your credit score, lower your debt-to-income (DTI) ratio, use a co-signer, and make a substantial down payment.
1. Lower Your Debt-to-Income (DTI) Ratio
When you lower your DTI ratio, getting approval for a mortgage is easy. The DTI compares your monthly gross income against debt payments, and it is expressed in the form of a percentage. You can calculate your DTI ratio by adding your gross monthly income and minimum monthly payments. You’ll then multiply the figure you get by 100.
You need to ensure your DTI ratio is as low as possible. Some loans require you to have a certain DTI, such as FHA and USDA loans. For FHA loans, the maximum DTI is 57%, and USDA loans need a DTI lower than 41%.
2. Use a Co-Signer
A co-signer is someone who has promised to assume financial responsibility in case you default on a loan; they usually check your credit standing to ensure you have a good chance of being approved for a mortgage.
A co-signer needs to understand what they are getting themselves into since they will assume financial responsibility by default and won’t have access to the home’s deed. A co-signer is exposed to more risks than they’re willing to take on.
3. Improve Your Credit Score
You can quickly get approved for a mortgage with a high credit score, even with a low income.
First, let’s delve into what is a credit score. A credit score is a three-digit number showing how well you honor your debts. The credit score ranges from 300 to 850. To raise your credit score, you should:
- Limit new credit applications- each time you apply for new credit, the credit score is affected.
- Never miss payments- your credit score is affected by your payment history. To improve your credit score, you should make payments on time. You can set up automated payments to ensure you won’t miss payments.
4. Make a Huge Down Payment
A substantial down payment makes it easy for a home buyer with a low income to get a mortgage approval seamlessly. Nevertheless, you might assume that a large down payment is impossible.
When you issue a sizeable down payment, you’ll gain from the lower interest rates, and the monthly payments will be low too, which means you won’t strain financially as you repay the mortgage.
After discussing how to acquire a home with a low income, you’re now comfortable with the entire process. Despite how challenging it may be to become a homeowner on a low income, assistance programs and loans have been put in place to ensure low-income earners can achieve their dream of owning a home.