Buy A Home With Less Income
Think an annual income of $50,000 isn’t enough to buy a home? Think again. While that’s a little less than the $56,500 median household income in 2015, converting from renter to homeowner is still an option.
If you’re motivated to buy property on a modest income, there are strategies you can use to stretch your dollars and convince lenders to come through with a mortgage.
Affordability: Know This Number
While many factors impact the amount you can borrow, your debt-to-income ratio (DTI), which compares your monthly gross income and the minimum payment on other debt, is essential to the equation. The standard maximum DTI for most lenders is 41 percent.
With a $50,000 annual income ($4,167 per month), $1,700 in housing and other monthly payments gets you a 41 percent DTI. If $400 of your monthly debt payments go to a car loan, a student loan and minimum payments on your credit card debt, you would have $1,300 to spend for housing.
With a five percent down payment and 4.0 percent interest rate, you could probably buy a home for a maximum price of around $200,o00.
However, a simple mortgage calculator doesn’t factor in property taxes, homeowner’s insurance or private mortgage insurance (PMI), which is typically required when you make a down payment of less than 20 percent.
Adding in those costs lowers your maximum home price. PMI varies according to your credit score and the size of your down payment, but it could add $75 to $100 to your monthly housing cost.
Expand Your Home Buying Budget
As you begin to look at houses in your preferred location, you may find that you’d like to increase your price range to get more of what you want in a home. There are several options to consider and discuss with your lender, such as the following.
Increase your down payment
If you have the cash, you may want to up your down payment to 10 or 20 percent. A down payment of 10 percent ($21,000) brings your maximum home price to $215,500, which may be enough to buy a home that you want.
If you don’t have the cash, keep in mind that you can ask relatives for gift money and you can search for homebuyer assistance programs from state and local government programs that provide down payment and closing cost funds.
Pay down your debt
Your debt-to-income ratio is impacted by the minimum payment on all your debt, so if you are able to pay down or pay off your car loan or eliminate your credit card debt you could have additional room in your budget for a higher housing payment.
For example, in the scenario above, reducing your monthly obligations by $200 could increase your maximum price to $234,000.
Use a piggyback loan
Another strategy that could help you increase your budget a little is to finance your home with a first and second mortgage to eliminate the need for mortgage insurance.
An 80-10-10 mortgage or an 80-15-5 refers to a first mortgage for 80 percent of the home’s cost, a second mortgage of 10 or 15 percent and a down payment of 5 or 10 percent.
Sometimes sellers are willing to provide that second loan. Either way, you can add $80 to $100 to your housing payment if you eliminate PMI.
Try a HomeReadyTM loan
Fannie Mae’s HomeReadyTM mortgage program has several advantages, including only a three percent down payment requirement, lower PMI premiums and expanded debt-to-income ratios, as high as 50 percent in some circumstances.
Consider an FHA loan
FHA-insured loans also allow for a lower downpayment of 3.5 percent and a debt-to-income ratio of 45 percent or higher. However, mortgage insurance adds to the cost of these loans.
Still, FHA mortgage insurance has come down in recent years. These loans are now more affordable than ever, especially considering low FHA rates.
Increase your credit score
Conventional loans have risk-based pricing, which means if your credit score is lower than 740, you’ll pay a higher interest rate on your loan.
Take steps to raise your score. It could mean you can lower your interest rate and therefore your monthly payments. You’ll also have a better chance of qualifying for a loan program with a higher debt-to-income ratio if your score is higher.
Consider an adjustable rate mortgage
A 5/1 ARM has a lower interest rate and can reduce your monthly payments. Make sure you understand how much your rate could change and whether you could afford the maximum possible payment.
Mortgage rates change frequently, but you can compare today’s mortgage rates to get an idea of the difference between an ARM and a fixed-rate loan.
Negotiate with the seller
There is no reason you can’t ask for seller contributions instead of a lower purchase price. Depending on the mortgage you choose, the seller can contribute three to six percent of the home price in closing costs. This can be used to reduce your mortgage rate and payment, or cover your PMI with a lump sum.
By purchasing a duplex, tri-plex or four-plex, you may be able to live in one unit and have your tenants pay some or all of your mortgage for you.
You can use a VA loan or FHA mortgage as long as you live in one of the units.