Real Estate & Personal Finance: How to Get a Mortgage on a Low Income

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Real Estate & Personal Finance: How to Get a Mortgage on a Low Income

get mortgage on a low income

A low income doesn't prevent you from getting a mortgage. Ultimately, your income determines how much you can borrow instead of whether or not you can borrow. While the more you make the more you can borrow, if your other debts are manageable, you won't need a very high income to buy a comfortable home.

Know Your Ratios

"Lenders look at two numbers to determine your ability to buy a home -- your credit score and your debt-to-income ratio," explains mortgage broker Jonathan Mosca. "To calculate your DTI, they divide all of your debt payments into your monthly income." In other words, the debt-to-income ratio looks at how much of your money is being used to pay debt that you already have. The loan-to-income ratio is similar to the debt-to-income ratio but looks only at how much of your monthly income will go to make the payments on the loan that you're trying to get.

While DTI standards vary among lenders, the Federal Housing Administration, or FHA, has a low-down payment mortgage program with a maximum DTI ratio of 43 percent, with some wiggle room. At the same time, the agency also has a loan-to-income ratio of around 29 percent. What this means is that if you make $40,000 per year, which is roughly 80 percent of the U.S. median household income as of February 2013, the FHA will lend to you up to a total monthly debt load of $1,433 with a monthly mortgage payment of up to $967 per month.

One Secret: Owe Less

"The secret to getting a mortgage is to cap your monthly debt payments at the difference between your DTI and LTI ratio," Mosca explains. For example, if you have the aforementioned $40,000 of income, your DTI supports $1,433 of debt, and your maximum loan payment is $967. If you have more than $466 in payments on credit cards, personal loans, vehicle loans and car debt, it'll cut into your maximum loan amount. For instance, if you have $600 in monthly payments, your mortgage payment will be capped at $833. For comparison, the monthly payment on a $100,000 30-year mortgage at 4.5 percent with $1,400 in taxes and $2,300 in mortgage and property insurance is $831.68.

Another Secret: Make More

While it's not always possible to make more money out of the blue, you can increase your income by buying a home with another borrower. "Adding a qualified co-borrower gives you more income to help you qualify, but make sure that they don't come with their own debts or credit issues," warns Mosca. Whether you have a family member, a spouse or a significant other cosign, his income gets added to yours when the lender calculates how much loan you can afford. "Remember that they'll be responsible for the loan, too," cautions Mosca.

Borrow Less

If you're starting out in home ownership with a relatively low income, you might not be able to buy as much house as you will when your income grows or when you have equity to use as a down payment. Instead of buying a brand new home, consider a less expensive used home. If you can find one that is in good shape but is a bit outdated, you'll save some money. You will also be buying the opportunity to increase the value of your home by updating it as you live in it. Mosca points out, "This doesn't just help you qualify for a mortgage now -- it also helps you qualify for a bigger home the next time around." If you're not an experienced home buyer, consider skipping homes that need major rehab and focus only on homes with cosmetic problems.