Reader question: “My income is fairly low, but I want to buy a house. Are there special types of mortgage loans for people like me? What else should I know about the process, given my financial situation? How can I get a house with low income but a steady job?”
You’ll need to show that you have sufficient income to keep up with your monthly payments, and that you don’t have too much debt in relation to your monthly earnings.
A new lending rule took effect in January 2014, and it’s entirely relevant to your question. It is called the Ability-to-Repay rule. As the name suggests, it requires mortgage lenders to make sure you have the ability to repay your loan. So if your income is too low for the monthly payments you are trying to take on, you probably won’t get approved for the loan in the first place. It’s great that you have a steady job, but that alone is not enough. You need to have sufficient income to repay the obligation.
Debt ratios also play a role here. You can get a house with low income as long as your debt-to-income ratio doesn’t exceed a certain amount. The exact limit varies from one lender to the next. But most draw the line somewhere around 43% – 45%. This means that your combined monthly debts (including the monthly mortgage payments you would be taking on) should not exceed 43 – 45% of your gross monthly income.
If you want to get a house with low income, you will need to be realistic and set your sights on the types of homes you can actually afford. You might want to get pre-approved by a mortgage lender. This would be a good place to start. The lender can look at your current income and debt situation and tell you (A) whether or not you can get a loan to buy a house, and (B) how much you might be able to borrow.
During the housing boom, lenders used to market all sorts of “low-income loans” to help borrowers get a house. Most of these were predatory, high-risk loans (income-only payments, payment option ARM loans, etc.). But times have changed. In 2014, you will need to have sufficient income to get a house. Most of these risky mortgage products have been prohibited outright, or else they simply aren’t used anymore due to the level of risk they bring.
You can “reverse engineer” this process to see if you might qualify for a home loan. Here’s how:
- Start with a hypothetical mortgage amount, based on average home prices in your area.
- Next, enter this amount into a mortgage calculator to see what the monthly payments would be.
- Add the monthly payment amount to your other monthly debt obligations (car payments, credit cards, etc.).
- Take the total from step #3 , and plug it into a debt-to-income (DTI) ratio calculator.
You are trying to determine how much of your gross monthly income would go toward your combined debts, after taking on the loan. If your DTI is higher than 45% – 50%, you may have trouble getting a house loan. If it’s well below that range, you might be in good shape. Of course, this doesn’t take the place of getting pre-approved by a lender. But it will give you some idea of where you stand.
This article explains how to get a house with low income, and how to measure your DTI. If you have other questions about the mortgage process, and how lenders evaluate potential borrowers, use the search tool provided at the top of this page. We have a large and ever-growing collection of articles on this website!