Homeowning is an integral part of building wealth and security for every American household. Most of them use home mortgages to finance their property, but first, potential borrowers need to meet specific criteria. Home mortgages are expensive, so the lenders seek out the safest borrowers possible, with high credit scores and secure jobs, but not every American uses traditional financial means.
Borrowers who are retired or self-employed don’t qualify for some loans because they own assets in property or business and don’t have as much saved in cash. This article focuses on the mortgage solutions for people who have low employment income, whether or not they own other assets. There are ways to become a homeowner regardless of your income.
Asset Depletion Mortgage
An asset depletion mortgage is the best option for self-employed individuals who seek out homeowning but are just starting out. No wonder asset depletion mortgage loans in California are popular since that is one of the states with the highest self-employment rates, which means that these loans are effective and helpful.
Providing you have substantial assets, you can apply for an asset depletion loan. The lender will calculate your monthly income by dividing your liquid assets by the length of your loan. If you don’t have traditional loan collateral, this will be a suitable way of financing a home purchase.
Typical asset depletion loan requirements involve a minimum FICO credit score of 680 and a loan amount not exceeding $3 million. Your assets can come from savings accounts, money market accounts, 401ks, retirement accounts, and even mutual funds.
Debt-to-Income Ratio?
The first things lenders take into consideration when assessing your borrowing abilities are credit score ranking and debt-to-income ratio. A credit score is a number that estimates how likely you are to pay your bills regularly, based on your credit history. Debt to income ratio expresses the available proportion of your monthly income.
Availability, in this case, means that you have enough money to spend after you have paid your monthly loan payments. If a lot of your monthly income goes on student loans and car payments, a lender might deem you unsuitable for a home mortgage. An optimal DTI ratio is around 40%, which should leave you with 60% of loan-free income. However, many types of loans allow a higher number, even up to 60% DTI.
Keeping a low DTI makes it possible to get a loan regardless of your income. Most lenders would be keener to work with borrowers who earn less but are more in control of their finances. If you have trouble keeping your DTI low, try cash-out refinance or restructuring your debt.
Typical Loan Criteria
Don’t get us wrong, there are hundreds of mortgage programs on the market, and almost every one of them is unique in its criteria and standards. We mentioned a credit score and a debt-to-income ratio as two main factors, but there are more, and income can be one of them.
Minimum mortgage requirements can change according to the state of the market, so the down payment amount and other criteria can vary. For example, a minimum down payment of 3% is required right now, but it was higher a few years ago.
A credit score cannot be lower than 500. Only on the rarest occasions will the lender agree to the terms with borrowers with a FICO lower than 550. A lender would approve of the borrower, provided, of course, that they have collected more money for the down payment.
Conventional loans typically require higher income, while FHA mortgages target medium and low-earning borrowers. However, there is no limit on how much money you need to earn in order to take out a loan, it is all calculated based on your personal DTI ratio.
How to Increase Qualifying Income
Not everything you earn counts as a qualifying income when applying for a home mortgage. Most people working part-time jobs will struggle with getting a loan, as lenders deduct it from QI. It bodes you well to gather as much income as possible, so the DTI ratio can be lower. There are ways to include more money in your monthly income.
If you have temporary government assistance or are a part of a protected group of citizens, include it as a source of income. Alimony and child support payments can help you, as well as many types of allowances. You can even use a retirement fund and pension as income.
What is a Co-Borrower
A co-borrower is someone who shares liability for the property and serves as a safety net in case the primal borrower has no money to pay months due. There are a few reasons why you would want someone to be your co-borrower.
You can actually buy a property with someone or you need someone else’s income to qualify for a loan. The process is pretty much the same, you are getting the opportunity to buy a property that you wouldn’t be able to buy alone. Although, co-signing can create problems if the two co-signers get into a fight or decide not to speak.
Subprime Mortgages: Pros and Cons
Lenders give out subprime mortgages to people who don’t comply with the abovementioned criteria for most typical loans. Since there is more risk of default, you would be offered a much higher rate than the one traditional lenders would offer.
So the main pro is that subprime mortgages allow people to own a property and stabilize themselves and their families. Subprime loans could be a good way to build credit – paying the debts with the cash and paying the bills on time to better your record.
The biggest downside to taking out a subprime loan is a higher rate and origination costs. There is a higher chance of default for people who take out a subprime mortgage but have insufficient income.
Consider this, too
Consider buying mortgage points, so you can trim the interest rate on a loan. Mortgage points are also called a mortgage discount bonus and serve as a way of prepaying some interest and getting different rates on a loan.
This option would work for you only in case you are self-employed or retired but have some cash to spend. People struggling with a low income usually don’t have this luxury, so they need tricks and treats to start thinking about homeowning.
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