US real estate market estimates appear unfavorable to buyers. Experts in the real estate industry point out that housing prices will continue to increase during the year 2022.
In this stage, would-be low-income homeowners find it difficult to access mortgage loans that allows them their dream of acquiring a home.
This is because lenders often limit how much debt people with low incomes can carry, in order to reduce the risk of non-payment. It is for this reason that many citizens have difficulty obtaining credit approval such as bank loans.
However, there are alternative mortgage loans that people with low incomes can access. At SoloDinero we explain how to do it.
How to get a mortgage loan if I have low income?
In general, the approval of a mortgage loan depends on three factors:
1) Credit score
Your credit score is essentially a way for lenders to determine your financial trustworthiness as well as your ability to pay. For common mortgage loans, a credit score, on average, of at least 620 is required to be approved for a mortgage loan. Loans backed by the United States government (FHA) require a lower score.
A high credit score also implies that, since the lender considers that there is less risk, the interest rates are more competitive.
2) Debt-to-income ratio
Perhaps one of the most difficult hurdles low-income individuals must navigate is achieving an efficient debt-to-income ratio. This indicator calculates the percentage of your monthly income in relation to the debt you have.
If, for example, you have an income of $4,000 a month and your mortgage payment is $2,000, you are considered to have a 50% debt-to-income ratio.
Since this indicator limits the percentage of mortgage payment that you can afford, mortgage loans are subject to this calculation.
3) Down payment capacity
The down payment on any home purchase is usually between 3% and 20% of the total price of the house. However, this figure may not be affordable for people with low incomes.
What can I do to improve my chances of getting a home loan if I have a low income?
There are some short, medium and long-term strategies that can help you achieve the long-awaited approval of a mortgage loan, among which are:
1) Pay off your current debts to lower your debt-to-income ratio.
2) Establish a savings plan to achieve a significant down payment that makes the loan attractive to lenders.
3) Raise your credit score to at least 620. There are effective techniques for this.
4) Borrow from multiple lenders, especially credit unions, which often target lower-income people as their clientele.
5) Be sure to include all of your forms of income on the credit application.
6) Get a co-signer on the loan.
What types of mortgages can I get if I have a low income?
There are different types of mortgage loans, some aimed directly at low-income people, among which can be named:
1- FHA loans
These are loans backed by the US federal government, and they represent an opportunity to purchase homes at those with low credit scores, between 500 and 580.
Other people who can apply for these loans are those who have filed for bankruptcy, as well as new would-be homeowners who may not be considered for other mortgage loans.
Initial payments will be subject, to a greater extent, to the buyer’s credit history. For example, down payments for a person with a credit score of 580 or higher, you will probably have to make a down payment of 3.5% of the total amount of the house. If you have a score that ranges between 500 and 579 points, the initial payment may be 10%.
Other government-backed mortgage loan options include loans from the United States Department of Agriculture (USDA). These loans are aimed at those who want to buy homes in rural areas of the country.
These loans establish a low initial payment, and even the possibility of not making any initial payment.
On the other hand, VA Home Loans are offered by the United States Department of Veterans Affairs (VA)aimed at active military service members or veterans, with more accessible requirements.
2- HUD Homes
This program, supported by the US Department of Housing and Urban Development, sells homes whose mortgages backed by the United States government have been foreclosed.
To acquire this type of housing, you must contact a real estate seller approved by this program. These houses are usually cheap, but they may need repairs.
3- Other alternatives
There are alternatives such as the Section 8 property program, which establishes assistance for people with very low incomes. With this program, you can use a voucher to purchase a home and receive monthly assistance. However, it is not available throughout the country.
There are also non-profit entities that can support you during the initial payment process in the form of loans or scholarships.
You may also like:
— What are the types of mortgages you can get in the US?
— Rise in interest rates: how expensive will your home mortgage now be in the US?
— How a reverse mortgage works in the United States
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