Home Loans for Low-income Earners: To be approved for a loan depends on a number of factors, including your income, assets, and credit score or credit history.
Home Loans for Low-income Earners – 4 Things You Need to Know
Thus, your strategy should be to increase your chances by managing the factors that will “say yes” to a loan. Alternatively, you could take another path. This article explains to you four important aspects that you must consider when planning for a home loan.
What factors will lenders consider
When it comes to applying for a loan, potential lenders will evaluate your credit-worthiness by using several factors. Thus, it is important that you fully understand them, in order to manage them to the best of your advantage. These main factors are:
- Credit score: credit scores evaluate your credit history. Usually, a score of 700 or higher is considered good. The great thing about a credit score is that you don’t need to be rich to have a good one, you just need a responsible credit history.
- Loan-to-value ratio (LTV): this is the ratio between the loan amount and the value of the property. Lenders will usually require that you take mortgage insurance if your LTV is lower than 20%. Thus, it can be an obstacle if you don’t have the necessary cash. A way to reduce it is to look for a cheaper property that will enable you to put down a larger payment.
- Debt service ratio: this value is calculated by dividing your net income by the total debt service. Total debt includes all your obligations, such as credit cards and other loans. Usually, lenders want it to be greater than one, in order to ensure that you will be capable of repaying the loan. One way to increase your chances is by paying off other debts or strategies such as debt consolidation.
Loans come in a variety of flavors
Another important aspect that you need to know is that you have several loan options. The main ones are:
- Fixed interest loans: this type of loan keeps the interest rate fixed. In this manner, you don’t have to worry about variations in the interest rate. However, it is usually more expensive.
- Variable interest loans: here the interest rate varies according to the market value. The advantage is that usually at the beginning it represents a cheaper option. Besides, if you have the cash, you can make advance payments and thus reduce your debt cost.
- Interest only loans: you pay the interest at the beginning, and once you have paid it off, you pay the principal. The advantage is a lower initial cost. This is a good option if you are expecting an increase in your earnings over time.
- Principal and interest loans: here you pay both, the principal and the interest rate together in monthly installments.
You have options
Having a low income doesn’t mean that you have no options. If you cannot get a loan, consider some of these actions:
- Save: saving until you have enough money for the 20% down payment can take some time, but if you have the necessary patience it could mean the path to a better home. This will have two effects. Firstly, it will reduce your monthly mortgage payment, and secondly, it may eliminate the need for mortgage insurance.
- Consider a cheaper area: most cities have areas where housing is cheaper. Although this may imply longer distances to work and other important places, consider other factors, such as schools for your kids, internet access, and availability of public transport. In this manner, your family will have a better quality of life.
- Investigate your loan options: there are numerous alternatives available online. Researching about loans can lead to a solution that you never expected and most lenders can work to tailor the loan to your financial situation.
- Consider an 80-10-10 mortgage option: this option implies taking two mortgages, one on the property you want to buy, and another on a second property. This strategy is characterized by the 80-10-10 relationship, where 80 stands for the loan-to-value ratio of your first mortgage, the first 10 represents the loan-to-value ratio of your second mortgage and the last 10 denotes the equity that you will have in the new property.
Have a balanced strategy
Buying a new property is not everything in life. You still need to consider living expenditures, transport and school fees for your kids (if part of the equation), medical insurance and more. Therefore, you must think about having a balanced budget strategy. For this, consider the advice of experts, who maintain that you should spend no more than 30% of your income on housing.
Furthermore, consider putting a larger deposit, which can provide a number of other benefits. Borrowing less may decrease your home’s overall interest costs. Don’t forget that if you can save a deposit of 20%, you’ll be able to avoid the cost of lenders mortgage insurance – and, you must agree, this is a substantial saving.
When you’re on a low-income situation, it is fair to say that it’s not always easy to grow savings. Nevertheless, you can boost your chances of loan approval by saving as much as you can in order to provide yourself your first home.
So, when you are finally ready to purchase a home, check around at several banks, credit unions, and home lending agencies and see who can provide the best solutions for you. Also, if you had a negative experience with denial for a home loan in the past, seeking advice from a financial counselor may be a good idea. She or he can help you to fix your credit score to the point where you will be eligible for a home mortgage.
Low income can be a transitory period in your life. Thus, think positively and create a strategy that best suits your needs. And remember,
“Some people look for a beautiful place, others make a place beautiful.”
Hazrat Inayat Khan
Sasha Belopoljanski is a writer who discovered his passion for providing creative solutions for building brands online. Following this passion, he continues to deliver awesome content through various niches.