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By Barri Segal
July 8, 2017
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 mortgage process, use a mortgage qualification calculator to figure out how much you can afford. Many lenders advise not to spend more than 28 percent of your income on your mortgage.
Here are five ways you can get a large mortgage with low 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 will likely continue for three years or more.
Here are other sources of income that you might not have considered:
Alimony or child support
Capital gains income
Disability income — long term
Employment offers or contracts
Employment related assets as qualifying income
Foster care income
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
Social Security income
Temporary leave income
Unemployment benefits income
VA benefits income
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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, you must have a yearly income that’s either equivalent to or less than the area median income for the census tract in which the property is located. The only exception to this rule is if the property is in a designated under served or high cost area.
The Home Possible rules state that if the property is in a high cost area, your annual income can exceed the AMI within certain limits. If the property is in an under served area, the AMI requirements don’t apply at all.
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.
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.
Lenders are more likely to put restrictions on non-occupant co-borrower loans, such as requiring a higher down payment. Government loans typically come with fewer restrictions.
For manually underwritten loans, the income from a non-occupant co-borrower might be considered as acceptable qualifying income. This income can offset certain weaknesses that might be in the occupant borrower’s loan application, such as limited financial reserves or limited credit history.
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.
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It might surprise you to know that income is actually one of the least important 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 percent 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. Some of the first few steps to buying a house are to establish great credit and substantial savings. It helps to have an emergency fund — enough in the bank to cover two to six months’ worth of bills and a credit score of 720 or better.
Other compensating factors include low debt, additional savings, a secure job with excellent prospects and documenting extra “unofficial” income. Even if you know you can’t “officially” count some kinds of income, it’s smart to document its existence anyway.
Natalie Campisi contributed to the reporting for this article.