How to buy a house with a low income

Buying a new home can feel out of reach if you’re concerned that you don’t earn enough money or that you haven’t saved enough to make a purchase.

Fortunately, programs exist that can help low- to moderate-income buyers make their dream a reality. Before you begin your research on different lending programs, there are a few things that you can do to make sure you will be able to qualify for home financing.

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

Address your credit

Credit has two components: the actual report and the score. The score is a calculation based on your credit history.

Improve your credit score

The credit score is an important factor in the lending process. Today, credit is used for borrowing, employment, insurance pricing and utility deposits. Scores range from 300 to 850. Generally speaking, the higher your score, the more credit opportunities that may be available to you.

Your credit score is typically determined by the timeliness of bill payments, the ratio between how much credit is available on open revolving accounts and how much is used, how long your credit has been established, the types of accounts you have and the number of recent inquiries that have been made by lenders into your credit history. Before applying for a mortgage, try to pay down credit card balances or explore debt consolidation options that may help improve your credit score.

Check your credit report

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

Once you receive your reports, look over them carefully. If you notice any errors or inconsistencies, try to get them resolved as soon as you can. Accounts that are not yours, addresses where you have not lived, and all other errors should be corrected.

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

Also, review your credit report to ensure that you are not behind on any bills or open credit accounts. Do not close accounts even if they have zero balances, because this could potentially lower your score by reducing the mix of accounts you have open.

Plan a monthly budget

Generally, lenders will offer mortgage products to you based on a monthly debt-to-income ratio of up to 43%. This ratio includes all debt payments found on your credit report in addition to the new mortgage payment. Creditors generally use the minimum monthly payment on your open accounts when establishing a debt-to-income ratio. Lenders may use your debt-to-income ratio when choosing what interest rate they will offer you. A higher proportion of your monthly income going towards debt may result in a higher interest rate on your mortgage and a payment that is higher than you are comfortable with.

By living within a budget, you can determine how large of a monthly payment you can afford along with all your other expenses. Begin by using your current rent or mortgage payment in 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 might also help you put money aside for the 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 want to budget for additional savings to be able to afford to repair something in your home if it breaks.

Build up your down payment savings

Sticking to a budget is one of the best ways to reduce expenses and increase savings, both of which may help build a down payment for your home purchase. Down payments typically range from 3% - 20% of the purchase price of a new home, depending on the requirements of the lender and mortgage product you choose. If you are able to save more than 20%, it’s possible a lender may offer you a lower rate on your mortgage since the principal amount you're looking to borrow will be lower.

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

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