5 Ways To Qualify for a Mortgage Even If Your Income Falls Short
The process to buy a home is exciting but takes time, research and money. And larger mortgages or mortgages with better rates usually require a high credit score and high income, too. If your credit history or income isn't up to what most lenders deem acceptable for a home loan, however, it's time to explore your options.
Rebuilding your credit is one way to improve your chances of qualifying for a large mortgage loan, but it can take some time to accomplish. There are several easier alternatives to help you figure out how to buy a house with a large mortgage when you don't meet certain mortgage requirements.
Before you even start the preapproval for the mortgage process, use a mortgage qualification calculator to figure out how much you can afford. Many lenders advise not to spend more than 28% of your income on your mortgage.
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Here are five ways you can get a large mortgage with low income.
Increase Your Qualifying Income
When underwriters look at income, they take a pretty conservative stance. For example, income from your part-time job might not be considered unless you have a history of working more than one job. And if you deduct unreimbursed business expenses on a Schedule 2106, your lender will probably also deduct them from your qualifying income.
However, sometimes the rules work in your favor. Per the Equal Opportunity Act Amendments of 1976, you can use income that you receive from public assistance programs to qualify for a loan if the income is likely to continue.
Here are other sources of income that you might not have considered, according to Fannie Mae:
Alimony or child support
Automobile allowance
Boarder income
Capital gains income
Disability income -- long term
Employment offers or contracts
Employment-related assets as qualifying income
Foreign income
Foster-care income
Allowance for housing or parsonage
Interest and dividends income
Mortgage credit certificates
Mortgage differential payments income
Non-occupant borrower income
Notes receivable income
Public assistance income
Retirement, government annuity and pension income
Royalty payment income
Schedule K-1 income
Social Security income
Temporary leave income
Tip income
Trust income
Unemployment benefits income
VA benefits income
Choose a Different Mortgage
Some mortgages have more forgiving guidelines than others when it comes to income. VA loans, for example, calculate income two ways: the standard debt-to-income method and the "residual income" method, which is much more generous.
For people with lower incomes, a worthwhile option is Freddie Mac's Home Possible program. To qualify for this program, the borrower's income is limited to 80% of the Area Median Income, also known as AMI.
An FHA loan might be another option to buy your dream home if you have a history of paying your bills on time, even if you experienced a period of financial hardship. FHA loan qualifications state that you might still be able to qualify for a loan, regardless of isolated cases of late or slow payments. It's also possible to qualify if you've had a bankruptcy.
Bring In a Co-Borrower
If you're still wondering how to get approved for a higher mortgage loan, you can bring in a co-borrower -- that extra income and equity will likely enable you to qualify for your home. Co-borrowers can be occupants or non-occupants. An occupying co-borrower lives in the home with you. A non-occupant co-borrower is more like a co-signer. This person doesn't live in the house but is responsible for the payments.
The majority of lenders will allow occupying co-borrowers to be on a mortgage loan. However, the income from a non-occupant co-borrower might also be considered as acceptable qualifying income on conventional loans from Fannie Mae and Freddie Mac or FHA loans. A non-occupant co-borrower's income can offset certain weaknesses that might be in the occupant borrower's loan application, such as limited financial reserves or limited credit history.
Get a Subprime Mortgage
The term "subprime mortgage" has a negative connotation because of the housing bubble and financial crisis it's often associated with, but subprime mortgages can actually be a gateway to home ownership for some people.
A subprime mortgage is a home loan with higher interest rates than their prime mortgage counterparts. The higher interest rates are in place to offset the risk of loan default by subprime mortgage borrowers who are risky customers because of poor credit. These mortgages can be either fixed or adjustable.
The benefit of a subprime mortgage is that people with poor credit don't have to wait as long to own a home. They can repair their credit by paying their mortgage each month, rather than waiting years to repair their credit and then buy a home.
The obvious disadvantage, besides higher rates, is that closing costs and fees associated with home loans will be usually higher for subprime borrowers. Although credit score requirements aren't as stringent for subprime loans, borrowers must still show proof that they can afford the mortgage payments each month.
Strengthen Your Application
It might surprise you to know that income won't get you very far on its own when it comes to underwriting criteria. If you don't believe it, try calling a few lenders. Tell them you make $1 million a year, but have a 500 FICO score and only 5% to put down. You will not get far.
However, people with low-to-moderate incomes get mortgages all the time, especially when they have excellent credit, a decent down payment and money in the bank. The first few steps to buying a house are establishing good credit and putting away substantial savings. It helps have enough in the bank to cover two months of mortgage payments -- and a credit score of at least 620. However, the higher your credit score, the better chance you will have to qualify for a lower interest rate, which means you will likely pay thousands less over the life of the loan.
Other compensating factors to consider when applying for a mortgage include a low debt-to-income ratio, additional savings and a secure job that you've worked at for at least two years.
If your credit score, job history, savings account balance or DTI needs improvement, it's wise to work on strengthening it before applying for a mortgage. Being patient and improving your financial standing can only work in your favor when it comes to getting approved for a mortgage loan. Plus, you could end up saving thousands of dollars.
Cynthia Measom and Natalie Campisi contributed to the reporting for this article.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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