If you have low income, there are still ways you can become a homeowner. Do not let that stop you from achieving your home-owning dreams.
Applying For A Mortgage
The process may not be easy, but there are still options for you and advisors to help you understand the different options.
When you are applying for a mortgage, whether your income is low or not, you should make sure your credit score is good. If your score is 620 or higher, your chances of getting approved are pretty good, even if the approval amount is not high. If your credit score is below 580, you may want to build it up before applying.
Each lender will have their own criteria as to what is considered a high-risk borrower and if you are not making a lot of money and have a poor credit score, getting approved will be tricky. You might have to consider getting approved through a non-traditional lender instead.
What Is A Non-Traditional Lender?
Non-traditional lenders are anything other than a bank, like mortgage loan companies or using a mortgage broker who will try and find you the best mortgage rates possible through their resources. Even with non-traditional lenders, you will still be seen as a high-risk borrower if your credit score is poor and will still have to pay higher interest rates.
If you are approved for a mortgage through a mortgage lender, it could be a great opportunity for you to improve your reputation with your bank.
Just make sure you are asking them questions too and that they are just as knowledgeable as financial advisors at a bank. Get them to explain all the fine print to you. Even through a non-traditional mortgage lender, there will still be high penalty fees to pay if you miss a payment or exit your mortgage term early.
Down Payment Options With Low Income
Just like there are different mortgage options, there are different ways you can come up with a down payment too.
One option would be to also borrow your down payment, which is considered a no down payment mortgage>>. But there are pros and cons to borrowing a down payment and a mortgage. You could be putting yourself in debt and have to pay interest on both of your loans. You also cannot borrow a down payment and mortgage loan through the same lender in Canada.
Another option would be to borrow from a trusted family member or friend. If you are going to do this, you should make sure everything is in writing and set up a payment agreement with them.
First-time home buyers can also qualify for certain programs, like the Home Buyer’s Tax Credit. You can claim up to $5,000 to help cover the down payment and closing costs. You could also take out $25,000 from your Registered Retirement Savings Plan account, but you will have to pay it back within 15 years.
Know Your Limit
If your income is low, you need to budget. Buying a house is more than a down payment and a mortgage. These things need to be taken into consideration as well:
- Closing costs
- Moving costs
- Property Taxes
- Furniture (if applicable)
- Other monthly payments (car, cellphone, student loans, etc.)
If you know you will have trouble paying for all these things, consider looking at a smaller, older home. Even if your home is a little outdated, make small repairs and updates as time goes on and you save more money. Eventually, you could have built up enough home equity to use a home equity line of credit and be able to afford a new house.
The Mortgage Stress Test
When you apply for a mortgage, you will be put through a mortgage stress test. Your finances will be looked at to confirm how much you will actually be able to afford. In a way, this could work out in your favour in case you think you can afford more than you actually can. It could help you determine what your monthly payments will be and what mortgage option would work best for you.
Do Not Be Discouraged
Yes, owning a house and being able to make payments is a large commitment, especially if you are not as financially stable as you want to be. But that does not mean you can never own a home. There are different options for you via government programs or receiving help from your family members. If you are buying a home with a partner, combining your income can help increase your chances of a higher mortgage loan too.
You may not be able to move into the home of your dreams right away, but after saving enough money, you will be able to get where you want to be.