Getting on the property ladder can be a long and complex process, even if you’re a high earner. But when you don’t earn loads of money, it can feel impossible. Can you even get a mortgage with a low income?
Most UK lenders will be willing to lend you about 4.5 times your annual income, so whether or not you can buy a home depends on how much you earn and how much homes cost in your area. There are a number of schemes designed to help first-time buyers purchase homes of their own. There are also schemes and strategies to help you save up for a home deposit. Here’s what you need to know to get a mortgage when you don’t have much money.
Be Responsible with What You Do Have
Lenders will evaluate your finances carefully to decide whether or not you’re a safe risk for a mortgage. You will need to provide documentation to prove your income. You can count income from your pension or benefits, child maintenance, bonuses, commissions, and overtime payments.
Mortgage lenders will test your affordability by examining your monthly outgoings – the amount you spend on bills, food, and other expenses, even things like hobbies and socialising. They will also check your credit record. A high credit score will work in your favour even if you have a low income, because it shows that you repay your debts in a timely fashion and are generally responsible with your limited funds.
Get Help with a Deposit
Raising the money for a deposit is one of the biggest obstacles most first-time buyers face. As a first-time buyer, you need a minimum deposit of five percent, which can take years to save.
Many first-time buyers get deposit help in the form of a gift from a family member or friend. A gift deposit can help you qualify for a mortgage. You may also be able to qualify for a family-assisted mortgage, where a family member puts up their own money or property to guarantee your loan. They must be willing to take over repayments if you can no longer make them.
No matter what you do to scrape together your deposit, it’s important to save as much as you can. A larger deposit will give you better odds of getting a home loan, because it will mean that lenders have to provide less of the money for your home purchase, and that means they’ll be taking less risk. First-time buyers can get a mortgage with a loan-to-value ratio of 95 percent, which means putting down a five percent deposit. However, you’ll stand a better chance of getting approved if you can afford to put down a deposit of 10 percent or more.
Take Advantage of a Home Buyer Scheme
Of course, not everyone has family members who can afford to help with a gift deposit. Fortunately, there are schemes available to help first-time buyers get on the property ladder. Through the Help to Buy: Equity Loan scheme, you can get a loan to cover a five percent down payment on a new build home in England. In England, the loan is interest-free for five years. In other regions, details of the scheme may differ, and you may not be able to use this scheme to get a mortgage to buy property abroad in a location like Charlottesville, VA.
If you live in a council home, you can take advantage of the Right to Buy scheme, which allows council tenants to buy their council homes outright at a discount. In England, the maximum discount is £87,200, except for in London, where it’s £116,200. You will be awarded a discount based on whether you live in a flat or a house.
Shared ownership mortgages are another option. Under a shared ownership mortgage, you can buy a share of the house – usually 25 to 75 percent to start. The remaining shares remain the property of the developer or local housing authority. Because you are only buying a share in the property, you can put down a smaller deposit and borrow less money initially. You can buy further shares in the property as time passes, until you own the whole property outright. While you will have to pay rent on top of a mortgage payment, the rent payment will be discounted to make it more affordable.
It’s not impossible to buy a home on a low income. If you can show lenders that you are responsible with money, and can come up with a deposit, you may be able to borrow up to 4.5 times your income. That may be enough to get you into a home, so you can start climbing the property ladder.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.