Buying a house can be challenging for anyone. But it can be especially frustrating if you have low income, meaning it might be tougher to qualify for a mortgage or make a down payment. However, when it comes to buying a house with low income, the process can be smoother if you work with the right lender and seek home-buying assistance.
Understand Low Income Home-Buying Programs
Several home-buying programs can make the path to homeownership less rocky when you’re a low-income buyer. Among them are:
- Section 502 home loans, backed by the U.S. Department of Agriculture (USDA), allow low- and moderate-income residents to buy a home in a rural area when they can’t qualify for a regular home loan. No down payment is required for these loans.
- Low-income borrowers can take advantage of FannieMae’s HomeReady mortgage program or Freddie Mac’s Home Possible program. These programs, available through most lenders, require a down payment of just 3%.
- Loans guaranteed by the U.S. Department of Veterans Affairs (VA) help active-duty members of the military, veterans, and eligible surviving spouses become homeowners. Benefits of these loans include no requirement for a down payment or private mortgage insurance (PMI), limited closing costs, and competitive interest rates.
- Many public housing agencies help low-income residents buy a home thanks to special mortgages, down payment assistance, and closing-cost assistance.
- Loans backed by the Federal Housing Administration (FHA) allow down payments as low as 3.5% and have credit score requirements that are lower than those for conventional loans. Depending on the amount of the down payment, your credit score can be as low as 500 or 580.
How to Buy a House With a Low Income
A low-income buyer may face obstacles in trying to realize their dream of home ownership. But those obstacles can be overcome. Here are some steps that a low-income buyer can take to boost their chances of being approved for a mortgage.
Establish a Budget
To get a handle on your ability to afford a home, create a budget. A budget spells out how much money you’re making and how much money you’re spending. It also can help you figure out where to cut expenses so that home ownership is less of a financial burden.
Start Saving for a Down Payment
Saving for a down payment can be one of the hardest parts of buying a home. But if you commit to doing it and give yourself plenty of time, you can save the money you need for a down payment. Here are six moves you can make to put aside money for a down payment:
- Figure out how much money you’ll need for a down payment. The National Association of Realtors reported in 2022 that the median down payment stood at 13% of the purchase price. Some mortgage lenders require a down payment as low as 3% (or no down payment at all).
- Deposit money for the down payment into its own savings account. This way, you’ll be less tempted to spend that money.
- Cut expenses. Look for ways to reduce spending so that you can put more money toward the down payment.
- Watch your spending. Keeping a close eye on your spending can help you make adjustments that might free up money for your down payment.
- Seek assistance. Various programs offer assistance with down payments, particularly for first-time buyers.
Pay Off Your Debt
Paying off all your debts before applying for a mortgage may not be possible. But reducing your debt, especially high-interest debt, can make you a more attractive borrower in the eyes of a lender.
That’s because mortgage lenders look carefully at applicants’ debt-to-income ratios. They want to see a ratio that reflects a healthy balance of debt vs. income. Lenders tend to view borrowers with a low debt-to-income ratio as less risky than those with high debt-to-income ratios.
One of the factors that a lender will look at when reviewing your mortgage application is your debt-to-income ratio (DTI). This ratio weighs your overall debt against your overall income. Most lenders require a DTI of no more than 43% (including your house payment), but some may accept a higher ratio.
Improve Your Credit Score
Improving your credit score can give you a better shot at qualifying for a mortgage, or at least qualifying for a mortgage with a lower interest rate.
Boosting your credit score takes time; there’s no speedy way to do it. Therefore, it’s important to work on lifting your credit score well before submitting a mortgage application. Most mortgage lenders require a credit score of around 620 in order to approve a loan application.
Among the things you can do to help increase your credit score are:
- Reduce your debt: How much debt you’re carrying makes up a big share of your credit score.
- Use as little of your available credit as possible: Restricting your use of credit can lead to a desirable debt-to-income ratio, which mortgage lenders take into consideration when reviewing your application.
- Resist the urge to apply for new credit: Recent credit activity is a factor in computing your credit score.
- Pay all of your bills on time: Payment history is a critical part of your credit score.
- Keep old accounts open: Closing old, unused credit accounts can shorten the length of your credit history, which is one of the components in calculating your credit score.
Qualifying for a Low Income Home Loan
Although lenders typically don’t impose a minimum income requirement to buy a home, the process can be complicated by factors such as your ability to make a down payment and your potentially shaky credit record. Nonetheless, it’s definitely possible for a low-income person to purchase a home.
If a lender claims your credit score won’t affect your mortgage application, they may not be a lender you can trust. A reputable lender always considers an applicant’s credit score as part of the mortgage approval process. If you’ve been promised that your credit score won’t matter, be suspicious.
If you’re a low-income homebuyer, you can expect a lender to:
- Review your budget: This will include an examination of how much debt you have vs. how much income you have. This is known as your debt-to-income ratio (DTI). Most lenders look for a DTI of 43% or less, although some allow ratios that are higher.
- Check your credit score: Different lenders require different credit scores. For instance, you might be able to qualify for an FHA loan if you have a credit score as low as 500.
- Review your income: Some loans geared toward low-income buyers come with income requirements. For example, you might not be able to get a USDA loan if your household income is no higher than 115% of the median household income in your area.
- Consider your background: If you are a military veteran or a rural resident, for example, you might qualify for a loan that’s appealing to low-income buyers.
First-Time Homebuyers and Homebuying Assistance
First-time homebuyers and buyers with low income may be able to take advantage of numerous state and local assistance programs. For example:
- The Texas State Affordable Housing Corp.’s Home Sweet Texas Loan Program offers a low-interest mortgage coupled with a grant of up to 5% of the mortgage amount to cover the down payment or closing costs. This program is available to all homebuyers, not just first-time buyers.
- The City of El Cajon, California, offers down payment assistance to low- and moderate-income residents through its first-time homebuyer program. It’s available to households earning no more than 80% of the median household income in the San Diego metro area. A borrower must contribute at least 2% of the purchase price for the down payment or closing costs.
Compare Loans for Borrowers With Bad Credit
Lenders who work with borrowers with bad credit may also be able to work with borrowers with low income.
|Company||Minimum Credit Score||Maximum Debt-to-Income Ratio||Minimum Down Payment|
|Prosperity Home Mortgage||600||45%||3%|
|Cherry Creek Mortgage||620||55%||3%|
Is It Worth Buying a House with Low Income?
It can be worth it to buy a house if you have low income, as owning a home can help build wealth. However, it might not be worth it if the mortgage payments would strain your budget. In the U.S., low-income homeowners made up 27.2% of all homeowners in 2020, down from 38.1% in 2010, according to the National Association of Realtors.
Who Should Not Buy a House with Low Income?
If your credit score could use a boost or you’ve got a pile of debt, it might not make sense for a low-income person to buy a home. In these cases, taking on a mortgage might worsen the financial situation. But if the financial situation improves, then a low-income buyer might be in a better position to afford a home.
What If You Don’t Get Approved for a House With Low Income?
If a lender rejects your mortgage application, it’s not the end of your home-buying journey. It just means you’ve got some work to do. To get on track, you might want to visit with a housing counselor to explore your options, improve your credit score, reduce your debt, ask a relative for a cash gift to cover the down payment, or find a co-signer for the loan.
What’s the Difference between Low Income and Affordable Housing?
HUD defines “low income” as household income that’s 80% of an area’s median family income or below. Meanwhile, affordable housing refers to a household that spends no more than 30% of its annual income on housing.
U.S. Department of Agriculture (USDA). “Single Family Housing Guaranteed Loan Program.”
Freddie Mac. “Home Possible.”
Fannie Mae. “HomeReady Mortgage.”
U.S. Department of Veterans Affairs. “VA Home Loans.”
U.S. Department of Housing and Urban Development. "Let FHA Loans Help You."
National Association of Realtors. “2022 Home Buyers and Sellers Generational Trends Report," Page 85.
Consumer Financial Protection Bureau (CFPB). "What Is a Debt-to-Income Ratio?"
Texas State Affordable Housing Corporation (TAHC). "Are You Eligible for TSAHC’s Home Buyer Programs? Watch the Video and Take the Quiz."
San Diego Foundation, Department of Community Development Housing Division“First-Time Homebuyer Programs for Low-to-Middle-Income San Diegans,” Pages 7, 13.
National Association of Realtors. "Middle-income Households Gain $2.1 Trillion in Housing Wealth in a Decade."
U.S. Department of Housing and Urban Development. "HUD'S Public Housing Program."
HUD: PD&R Edge Magazine. “Rental Burdens: Rethinking Affordability Measures.”