How to buy a house with a low income

There are a few things you can do to improve your chances of qualifying for home financing in your current situation. 

The following steps will help guide you along the path to homeownership.

Address your credit

Credit reports and credit scores are key factors in the lending process. A credit score is a number that helps predict how likely someone is to pay back a loan and make payments on time based on information from a credit report.

Credit scores typically range from 300 to 850. Generally speaking, a higher credit score makes it easier to qualify for a loan and may lead to better loan terms and interest rates.

A person's credit score is typically determined by factors such as:

• Their bill-paying history
• How much available credit they're currently using
• How long their credit accounts have been open
• The type of credit accounts they have
• New credit applications they have made

Before applying for a mortgage, try to pay down credit card balances or explore debt consolidation options that may help lower your monthly outgoings.

Check your credit report

To prepare for home buying, try to get copies of your credit reports from the major credit reporting agencies. To get a free copy of your credit reports, go to AnnualCreditReport.com. 

Once you receive your reports, look over them carefully. If you notice any errors or inconsistencies, try to resolve them as soon as you can. Credit accounts that are not yours, addresses where you have not lived, and all other errors should be corrected with the relevant creditor or credit reporting agency.

Check again in several months to be sure any requested changes were made. Lenders may assume everything is correct when they request a copy of your credit report from a credit reporting agency to determine if you qualify for financing.

Also, review your credit reports to ensure you are not behind on any credit accounts. 

Plan a monthly budget

Generally, lenders will consider your debt-to-income ratio (DTI) when you apply for a mortgage. Your DTI is calculated by dividing your monthly debt payments by your gross monthly income. Lenders usually set a maximum DTI ratio for mortgages and other loan products.

Lenders may also use your DTI when choosing what interest rate to offer you. A higher proportion of your monthly income going toward debt may result in a higher interest rate on your mortgage and a higher payment than you are comfortable with. 

By living within a budget, you can determine how large of a monthly payment you can afford with all your other expenses. Start by factoring in your current rent or mortgage payment into your budget, and then plan to save the largest amount possible for a few months to see if you can manage a higher monthly expense. This may also help you put money aside for a down payment and closing costs when you decide to purchase a new home.

The total cost of homeownership includes more than the mortgage payment. Other expenses, like maintenance and utilities, need to be considered. You may also want to save money for emergency home repairs.

Build up your down payment savings

Sticking to a budget is one way to reduce expenses and increase savings, which may help you put money aside for a down payment for your home purchase. 

Typically, you'll need a down payment of at least 3% of the price of a home, with many lenders requiring 5% or more. Generally, the higher your down payment, the less your loan will likely cost. You may save the most money by putting down at least 20%.  

If you plan to make a down payment of less than 20%, you may be required to pay private mortgage insurance (PMI). It’s good to be aware of all potential fees related to a home purchase so you can budget and save accordingly.

Other ways to save money for a down payment include finding an additional source of income, such as taking on a second job or searching for a roommate to help pay rent.

Meet with a lender

A mortgage lender can help review your mortgage options, which may include conventional purchase mortgages and government-backed home loans. They can also help you understand how much financing you may qualify for and how much money you may need for a down payment. 

A lender may look at your income and determine what loan amount you can afford and what your monthly payments may be. They may also help you get pre-approved for a loan, which might enable you to proceed through the homebuying process with confidence and peace of mind.