Do you have what you consider ‘low income?’ Are you concerned that you won’t be able to secure the size loan you need to buy your dream home? Before you let go of those dreams, learn how you can get a bigger mortgage than you thought even if you have low income.
Lenders look at the big picture when determining your eligibility for a home loan. They don’t focus just on your credit score or just on your income, for example. Instead, they take every piece of the puzzle and put it together. They look and see if any of your negative factors are outweighed by positive factors. Then they make a decision on your loan application.
So how do you get that bigger mortgage that you wanted? Keep reading to learn the secrets.
Watch Your Credit Score
If you are worried about what a lender will think of your mortgage application, spruce up your credit now, before you apply. This is their first impression of you. They look at your score before they evaluate anything else. They do this because the credit score tells them a lot about you. A great credit score means you are financially responsible and worth taking the time to evaluate. A bad credit score means you aren’t financially responsible and may not be worth the risk.
If you know you have low income, it’s time to work on that credit. Bring all of your accounts current and minimize the amount of outstanding credit card debt. Avoid applying for any new credit during the first few months leading up to your mortgage application, and don’t close any revolving credit accounts during that time either.
These habits will help your credit score improve, hopefully in time for you to apply for the mortgage you need.
Watch Your Debt Ratio
This is a big one if you have low income. The lender will pay close attention to your debt ratio because they need to make sure you can afford the loan payments. The lender will focus on your housing ratio (the amount of your gross monthly income that the housing payment would take). They will also focus on your total debt ratio too, though. The total debt ratio is the combination of all of your monthly debts including the new mortgage payment compared to your gross monthly income.
It’s safe to say that the lower your debt ratio, the greater your likelihood of getting the bigger mortgage. Of course, you can only secure a mortgage that fits within the housing ratio a lender allows. But different programs have different debt ratio requirements. If your DTI is high, you may want to consider the FHA loan. They have the most forgiving debt ratios.
FHA loans allow a front-end ratio of 31% and a back-end ratio of 43%. This is as about as forgiving as it gets, unless you are a veteran and are eligible for VA financing. Because the FHA has the most flexible guidelines, many borrowers turn to this program, and not just first-time homebuyers.
Apply for a Guaranteed Loan
The US government has several mortgage programs that are ‘guaranteed.’ The FHA loan is one, as is the VA loan and the USDA loan.
The FHA loan, as we discussed above, has the most flexible guidelines. It also has the guarantee of the FHA. They will pay the lender back a portion of the funds the lender loses should you default on your loan. This allows lenders to accept riskier qualifying factors, including a higher debt ratio from an applicant with low income.
The VA loan is for veterans that served enough time in the military. If you are eligible for the program, the VA gives the lender their guarantee should you default. The VA guarantees 25% of the loan amount the lender is stuck with if you default on your loan. This is how VA lenders are able to provide you with 100% financing and flexible qualifying guidelines.
The USDA loan is for borrowers that live in a rural area and whose total household income doesn’t exceed 115% of the median income for the area. The USDA guarantees these loans for lenders as well, giving lenders a little flexibility when providing you with a loan even if you have low income.
Your best bet when applying for a mortgage if you have low income is to make sure you have good qualifying factors first. Then you can start shopping for a loan, outside of the conventional guidelines. Conventional loans have the strictest requirements and are harder for borrowers with low income. Instead, sticking to government-backed loans can provide you with the greatest results.