It’s a common question – how to get a mortgage on a low income? If the time has come for you to start investigating which mortgage you can get but you know that your income may not qualify you for the mortgage that you want, don’t despair!
Mortgage Qualification Factors
Any mortgage lender considers several factors before approving or disapproving any loan application. The lender will also use these factors to determine the type of terms used in repaying the loan. Before thinking of how to get a mortgage on a low income, you should start by considering the following factors.
1. Credit score
This is the most important factor that’s considered when applying for a long. How good is your credit score? You’ll need to let your lender access any information that can be used to evaluate your credit score. To qualify, it’s essential that you regularly check your credit reports as well. Lenders would also want to know that you are not deep in debt and that you’re servicing all your debts. Your credit score is the main factor that mortgage lenders use in to determine whether you are a responsible borrower who can service your loan, regardless of how much you earn.
A credit score of over 740 will have lenders competing to lend to you with the best mortgage terms. However, with a credit score of less than 620, you’re more likely to get your loan application rejected. And if you get lucky, you may get a mortgage loan at high-interest rates. This is why you need to take steps in improving your credit score. These steps include establishing a positive history of timely payments, which will help you in finding loans with friendly terms.
2. How much you earn
How does your salary compare to the loan amount you want to borrow? Lenders avoid giving out mortgage loans that will make you poor after spending a large percentage of your salary on your home loan. Most lenders ensure that your total housing costs, that includes your homeowners’ insurance, property taxes and mortgage are less than 28% of your total income.
If you’re not having or servicing any loans, mortgage lenders will allow your housing costs to have a slightly larger percentage of your total income. But still, a mortgage lender won’t let you overburden yourself to the point where a small financial setback can make you miss payments.
3. Your total debt load?
What’s your total debt load? Apart from the credit score and how much you earn, lenders also consider your total debt load. If your current financial situation shows that you’ve maxed out all your credit cards or you’re over your head with debt, don’t expect any lender to approve your mortgage application. For most mortgage lenders, they allow a maximum debt-to-income ratio of between 36% and 43%. If summing up all your debts, including the mortgage you are applying for, housing costs, and any other loans you’re servicing exceed this amount, you may not qualify for the loan.
4. Are you employed?
Can you prove you’re steadily employed despite of the amount you’re earning? What’s the likelihood that you’ll remain employed? The likelihood that you will remain employed for a long time is a big concern to most lenders, who are concerned about how you will service your mortgage if you leave your job. Mortgage lenders also use your past behavior to predict the future. If you’ve only been employed for only a month before applying for the loan, or your history shows that you’ve repeatedly been bouncing from one job to the other, this raises flags that could lead to loan denial.
Most mortgage lenders consider loan applicants who have more than two years of steady income. In case your income increased suddenly over the past year, your mortgage lender may not consider your new income when doing the validation and calculating the rates. For instance, if you made $30,000 last year and $80,000 this year, your lender will consider your income as just $30,000, especially for those individuals who are self-employed.
5. Down payment.
How much money can you afford as a down payment? Some mortgage lenders only require 3% of the amount applied as down payment. However, if you want to borrow more than 80% of the worth of your home, you’ll need to pay private mortgage insurance. This unnecessary expense is meant to protect your lender in the event that you decide to sell your home, and you end up receiving a less amount that can’t pay off the mortgage.
When applying for a loan, lenders also evaluate the amount of cash you can borrow by also considering the amount of money in your bank account, as this shows that you can also save money despite your daily expenses, utility bills, and any other loan repayments. Other costs that may be incurred in the loan application process include pre-purchase inspection fees, legal or processing fees, repair and maintenance fees, and insurance. The rate also increases depending on the amount of time taken to repay your loan. Taking low-income loans for short periods may help you get you approved for a higher mortgage amount. But it still depends on your income sources.
What income do sources qualify you for a home loan?
While income and your credit score are the most significant factors that are considered when it comes to mortgage loans, nowadays most lenders consider other kinds of income sources when evaluating a loan application. Apart from having a stable job, receiving regular government payments or rental income, lenders also consider other allowances including child support payments, Centrelink payments, pensions (disability, overseas, retirement, veterans, etc.), and any other money sources that add contribute to your monthly income. All that’s needed of you is providing proof of these financial sources and submit the proofs with your application forms. Reference: (https://www.moneysupermarket.com/mortgages/first-time-buyers/top-ten-tips/)
In some cases, lenders approve applications for individuals who don’t have active employment but have a good amount of cash in their bank accounts. This is applicable for individuals who apply for mortgage loans from the same banks, although some lenders may also accept this.
Terms and conditions also vary from one lender to the other, so it’s advisable to compare each lender and pick a lender that works best for you.
What income documents are typically expected when applying for a mortgage loan
Applying for a mortgage loan is pretty simple. All that’s needed is providing the needed documents, filling out a detailed application form and submitting it. Your lender will then asses your documents and validity, and after some (which varies from one lender to the other), you will be informed if your loan application has been successful or not.
Getting needed documents for a mortgage application is a time-consuming process, especially when you have to tell others to provide them. Here is a list of documents required:
- Proof of identity. This can be any identity document including a birth certificate, a valid passport, a driver’s license, a citizen’s certificate, and sometimes, credit cards.
- Council tax statement. You should also submit the latest council tax statements.
- Bank statements. Physical bank statements are needed to prove how much you earn and your address as well. Lenders use these statements to assess your incoming income and outgoing income, including the amount of debt you’re paying and other loans.
- Utility bills. These should be at least three months old and must be registered under your address and name.
- Payslips. Most mortgage lenders also ask for the latest pay slips dating back to at least three months. However, this can vary from one mortgage provider to the other. You can also opt for online pay slips as long as they include your personal and company details.
- SA302. If you’re self-employed, you’ll need to provide this information going back for at least two or three years.
What about Home ownership schemes?
The UK has plenty of schemes available to help people low earning individuals get onto the housing ladder. Below are some of the most popular schemes, how they work and whether you’re eligible to apply.
• Help to Buy equity loans
Under this scheme, one can borrow an equity loan of up to 20% of the property’s value from the government. One can apply for this mortgage by making a deposit of 5% or higher, and the equity loan will act as a top-up for this. You’ll then be able to get a mortgage on the remaining percentage of the property. You’ll then start paying interest on the loan after five years. The loan will be fully paid when you sell the house.
• Right to Buy
If you’re living in social housing, you may have a chance of buying your property at a cheaper price than its market value by using the Right to Buy scheme. This discount will typically depend on the type of house you live in and the duration you’ve lived there. The Right to buy scheme is available for individuals who live in council properties and some housing association tenants. To be suitable, you’ll need to have lived in the house for the last three years or more. This scheme also has a lot of variables. Moreover, not all lenders offer mortgage loans to individuals who buy under this scheme. As a result, it’s worth asking a mortgage broker for a clear view of their options and considerations.
Most mortgage lenders will consider lower income applicants who have guarantors to their mortgages. A guarantor is a person who agrees to cover an applicant’s debts in case they fall behind or default on their mortgage repayments.
• Shared ownership
In shares ownership, two or more people are allowed to partially purchase and partially rent properties from the housing association. Under the shared ownership scheme, one can purchase a share of the property in the range of 25% and 75%. You will then pay the remaining share as rent to the housing association. Additional shares can be bought whenever you find it affordable and convenient for you. This is referred to as “stair casing”. Your house will be revalued every time you increase your shares. Not all mortgage providers offer mortgage loans for shared ownership properties; that’s why you should consider using a mortgage advisor to get yourself the best deal.
• Joint mortgages
You can also apply for joint mortgages for up to three other people. By doing this, mortgage lenders will combine and consider your income jointly, which means that you may qualify for a higher mortgage. Nevertheless, your lenders will consider your creditworthiness jointly. If one of your partners has a bad credit score, this could reduce the chances of your loan application being approved. If one of your partners stops making loan repayments, you’ll all be responsible for defaulting. Also, you won’t be allowed to sell your property unless all your partners agree to do so.
Joint ownership is available in two types: tenants in common and joint tenants. With the latter, your share of the property will be passed onto your co-owner(s) when you die. With the former, you’re allowed to leave your share to anyone you wish.
How to Get a higher Mortgage with a low Income
Before you even start applying for a mortgage, use a mortgage calculator to find out how much mortgage you can get and if you can afford to pay the amount and at what rate. Many lenders advise against spending more than 28 percent of your total income on repaying your mortgage. Reference (https://www.mortgagecalculator.org/helpful-advice/mortgage-qualifications.php)
Below are five ways you can use to get bigger mortgages with low incomes:
1. Increasing Your Qualifying Income
When lenders look at income, they’re very conservative. For instance, income from your part-time job may not be considered if you don’t have any history of earning from more than one job. You can also use income generated from other public assistance programs to qualify for a mortgage loan if you’re likely to receive the income for three or more years.
These other sources of income include:
• Child support
• Car allowance
• Capital gains income
• Boarder income
• Disability income — long term
• Employment contracts
• Employment-related assets that qualify as income
• Foster-care income
• Foreign income
2. Choosing Different Mortgage types
Some mortgage types have more friendly rules than others in terms of how much you earn. VA loans are a good type of an alternative mortgage loan. VA loans calculate income in two ways: the residual income method, which is more generous and the standard debt-to-income method.
3. Using Co-Borrowers
Bringing in a co-borrower can also make you qualify for higher loans. A co-borrower will offer extra income and equity that will likely make you qualify for higher loans. You can decide to have Co-borrowers who are occupants or non-occupants. Occupants will live in the home with you, and the property will be passed to his/her name in case of death while a non-occupant co-borrower is just like a co-signer. He/she won’t live in the house but will be fully responsible for the payments of the loan.
4. Getting a Subprime Mortgage
Subprime mortgages are actually a gateway to home ownership for most people. Subprime mortgages are home loans with higher interest rates compared to other prime mortgage counterparts. The higher interest rates are used to cover the losses that will be incurred in case subprime mortgage borrowers decide to default as evident from their poor credit. These subprime mortgages are available in two types: fixed and adjustable mortgages.
The good thing about a subprime mortgage is that individuals with poor credit won’t have to wait for long before being able to own a home. They can improve their credit score through paying their mortgage in time, instead of waiting for years to better their credit before buying a home.
5. Strengthen Your Application with a decent down payment
People with low incomes get mortgage loans all the time, as long as they have an excellent credit score, money in the bank and a decent down payment. Establishing substantial savings and great credit helps one to have an emergency fund, that can cover bills for up to six months. You should also have a credit score of 720 or more.
Factors to Consider to Reduce the Risk of Mortgage Repayment Woes
Several factors influence a mortgage negatively, but all that’s needed of you to prevent mortgage repayment woes is patience, being keen and not falling for temptations. It’s vital that a home buyer knows his/her limits, and has a clear vision and understanding of what lies ahead of him.
As much as the individual factors of a mortgage loan may seem perfectly fine, you’ll start encountering the problems when all these factors come into effect simultaneously. Here are some factors you should consider before signing for that mortgage loan. Reference 🙁 https://www.moneysupermarket.com/money-made-easy/ten-ways-to-maximise-your-mortgage-chances/)
1. The Terms
The terms are the main mortgage factors that should be considered. When it comes to the period of the loan, and the interest rate, you may always think that the shortest loans with the lowest rates are a good idea. But it’s worth considering that longer loan duration’s have lower monthly repayments. Although it may seem as higher interest rates, longer loan duration’s have more manageable monthly payments compared to loans with short duration’s.
You should also consider the percentage of income that the loan repayment would represent. It’s advisable to keep your mortgage payments less than 30 percent of your total monthly income, with statistics showing that individuals who are paying above that rate being more likely to encounter financial difficulties which may lead to defaulting.
2. The Lender
Since a mortgage loan will be a long term loan, it’s essential that a borrower maintains a good relationship with their broker. This will come in handy in the event that you come across issues in the future which might require some clauses to be changed.
This is also useful in case you want to restructure your mortgage or if you want to remortgage the property. That is why you should always compare different lenders before settling on one that stands out from the rest. Check out for their terms, fees and any other hidden information. It would also be good if you involve your mortgage advisor in the discussions.
3. The Hidden Bonuses
Finally, a wise mortgage applicant will look beyond the monthly repayments and the loan rates and identify where the hidden bonuses are. For example, certain mortgage factors are tax deductible, which can save you a good amount of money in the long run.
Tips for increasing your chances of getting a mortgage loan with a low income
You can also increase the chances of getting a mortgage, even if you earn a low income. Below are some few options you should think about according to moneysupermarket.com:
• Joint applications.
As stated above, applying for a mortgage with a partner, preferably your spouse combines two different income sources, which raises your ability to repay the mortgage. Since lenders will take into consideration the financial history and credit score of both borrowers, ensure that you both have good financial histories. It’s also important to note that before applying for a mortgage, you should settle on a legal agreement of how the property will be subdivided in case anything happens in future.
• Borrowing less.
The lower the loan amount you apply for, the higher the chances of your loan being approved. This is because small loans are less risky to the lender compared to big loans, and a low mortgage size means low repayments that will be more likely to fit into your financial budget.
• Lessen your existing liabilities.
Apart from your income, lenders also look at your other financial activities. Few liabilities with less outgoing transactions with a reasonable income shows that you can comfortably bestow to mortgage repayments.
• Larger deposit.
Low-income earners get a better chance of loan approval if they have saved a decent amount of money for the deposit. A large deposit enables you to borrow less money, which will result in lower payments. It also shows your lender that you can maintain financial discipline, which means that you can pay back your mortgage on time.
Don’t let your income hinder you from owning your dream home.
I believe that the information provided above on how to get a mortgage on a low income will play a huge role in making your Mortgage decision. Lastly remember that its never too late to do good in your life, don’t shy away from getting yourself your dream home because of income of age. Its all about proper planning and discipline, and you’ll have your Mortgage approved.