How to buy a house with low income

Quick insights

• Improving your credit score, debt-to-income ratio, making a larger down payment or including a co-signer on the loan application can help borrowers be approved for a mortgage.
• When preparing to buy, achievable goals and a detailed budget are important.
• There are Federal and local programs which might make buying a home easier for individuals and families with limited financial resources.

For many people, buying a home is the most significant purchase they’ll ever make. If you're living with limited financial resources, it’s easy to feel like homeownership is just out of reach. However, there are many programs geared toward helping those with low income become homeowners. With careful planning, buying a house with low income is possible.

In this article, we’ll lay out how you can begin assessing your financial position, strategies to improve your mortgage approval chances and the types of programs you may want to investigate for support.

Understanding your financial position

When preparing to buy a home with low income, it’s important to understand how a lender will interpret your finances. Three of the aspects lenders will look at are your income and expenses, your credit score and your debt-to-income ratio.

Income and expenses

Gearing up to purchase a home begins with a firm understanding of your budget. Reviewing your most recent three months of bank statements can be a good place to start tallying up your income and expenses. This can help give you an idea of how big of a monthly mortgage payment you will be able to afford before making any changes. Later, we’ll walk through how to update your budget to accommodate savings goals.

Credit score

In the eyes of a mortgage lender, your credit score is a representation of your “creditworthiness,” or how likely you are to repay your loan. Having a high credit score can help you be approved for a mortgage and determine the rates you qualify for. If your credit score is on the lower end, you may want to consider your payment history, credit utilization or credit mix.

Debt-to-income ratio (DTI)

DTI is a ratio that measures your income against your total debt. When applying for a home loan, your lender will assess your current debt along with your potential monthly mortgage payment. Tolerance for DTI will depend on the lender, but as a rule-of-thumb you may want to have a DTI below 36%. If a more significant percentage of your income is used to repay debts, your DTI is generally considered high.

Qualifying for a mortgage with low income

Once you’ve assessed your budget, credit score and DTI, you can begin strategizing for your mortgage approval process. With a low income, there are certain steps that can help homebuyers qualify for a house with low income, such as:

• Working to improve your credit score: Depending on where you’re starting from, it may take months or years to substantially improve your credit score. Paying bills on time and keeping credit utilization low are generally considered high-impact factors, though improving your “credit mix” (the types of credit you use) and the number of recent credit applications can also make a difference.
• Saving for a larger down payment: If you’re earning a low income, saving for a larger down payment may feel like a major lift. However, if your goal is to purchase a home, the time it takes may be worth it for potentially better approval odds and rates. A larger down payment means a smaller loan for the lender, which could make them more likely to approve it.
• Considering a co-signer: From a lender’s perspective, a co-signer improves the odds of the loan being repaid and makes it less risky. If you have a trusted friend or family member who is willing to co-sign your loan, it could improve your chances of being approved. However, realize that this is a big request to make of anyone in your life; they will be responsible for repaying the loan if you cannot.

Exploring home buying options for low-income buyers

If you’re trying to buy a house with a low income, you may want to investigate programs geared toward providing income-based support.

Federal Housing Association (FHA) loans

FHA loans are insured by the federal government, allowing lenders to provide mortgages to individuals who might not qualify for other mortgages. FHA loans generally have lower credit score and down payment requirements compared with conventional mortgages. Those who want to apply for these loans must work with an FHA-approved lender and be prepared to pay mortgage insurance premiums (MIPs) as part of their monthly costs.

Local housing programs

You may be eligible for support from locally run housing programs designed to help those buying homes with low income. Certain cities and states offer down payment assistance, closing cost coverage and specialized loans to individuals and families with low income. This sort of program may include or require homebuyer education classes or counseling. The actual programs available can vary widely by area, so search for options in the specific area you want to buy a home in.

Tips for preparing to buy a house with low income

It’s typical for homebuyers to go through a period of saving before moving forward with a home purchase, regardless of their income. This is because a home purchase normally require a down payment and closing costs. The savings process may be more challenging for those who plan to buy a home with low income.

Setting a realistic savings goal

How much do you need to save before you’re ready to make your purchase? Once you’ve done your research and have a figure in mind (such as “$10,000 for a down payment”), assess your budget and see how much you can realistically set aside each month toward that goal. If the math makes your goal feel too distant, see what budgetary changes you can make to potentially save at a faster pace.

Adjusting your budget

Using your recent bank statements, find areas of higher spending that stand out and see what can be adjusted while you prepare to buy a home.

• Discretionary spending. Before looking at reducing expenses for “needs,” it’s important to consider how much you spend on “wants.” This includes entertainment spending, such as money set aside for celebrations, subscription services and nights out.
• Usage-based expenses: Then, see if you’re able to make reductions to usage-based expenses, such as groceries, gas and utilities. Small adjustments to your grocery list (such as by shopping sales or buying in bulk), driving your car less or being more energy-conscious at home can help you save.
• Bigger changes: If you still feel you aren’t able to make room to save, downsizing expenses that are “fixed” (or unchangeable) might be necessary. Some people who are very serious about saving for a home may choose to move to a smaller apartment or one in a more affordable area. Furthermore, it may be appropriate to ask for a raise at your current job, look for a new job that’s higher paying or take on a side hustle to improve your income.

Keep in mind, unexpected expenses are bound to pop up from time to time. Some people may choose to set aside money in an emergency fund in order to avoid spending the money they are saving specifically for their home purchase.

Setting aside and automating your savings

Designating a specific bank account for home savings can help keep this money reserved for its purpose. Additionally, if you have a consistent amount you plan to save each week or each month, consider setting up automatic transfers to this account. This can help reduce the effort needed to remember and transfer it manually. With the passage of time, you may find yourself surprised at how much you’ve saved!

Preparing for a home purchase ahead of time

With enough financial legwork, one day you may feel fully prepared to buy a home. While detailed budgeting can help along the way, your timeline can vary. At any point, you may want to use an affordability calculator and speak to a Home Lending Advisor. This could clarify your options, help you budget and prepare for the homebuying process in other ways, especially if it’s the first time.

Bottom line

While having low income can make purchasing a home more challenging, there are still many things you can do to get closer to this goal. Saving carefully, arranging your budget, raising your credit score and lowering your DTI are all things an individual buyer can work on. Additionally, you may qualify for income-based programs designed to make homeownership more accessible. Using affordability calculators and regularly crunching your numbers can help you prepare.

As a final note, Chase happens to be an FHA-approved lender. If you’re interested in exploring your mortgage options, consider reaching out to a Home Lending Advisor.