Owning a home is part of the American dream, and everyone should have the opportunity no matter who they are. That’s what mortgages are for--to help Americans achieve homeownership. But if you are on government assistance, you may be wondering if you can even get a home loan. Well, the short answer is yes, you can get a loan while receiving government assistance. But that doesn’t necessarily mean you will. Whether you are on government assistance or not, there are several key factors that lenders consider to determine if you can get a loan and for how much.
Debt-To-Income Ratio (DTI)
DTI ratio is a percentage that determines how risky it is to give you a loan. Your DTI ratio is your total monthly debts divided by your gross monthly income. In other words, it determines, on a monthly basis, how much of your income goes toward your debt. Your debt includes the proposed loan, rent, credit cards, and all other regular payments like alimony and child support. Ideally, lenders want your total monthly debt to be less than 43% of your gross monthly income.
Each lender and loan type has different credit score requirements, but it goes without saying that the higher your credit score, the more likely you are to get a loan. A high credit score tells the lender that you are financially responsible, regularly pay your bills on time, and don’t miss payments. Whereas a low credit score means the opposite and may scare lenders off. Reliable borrowers are attractive to lenders because if you regularly pay your bills every month, you are more likely to make your payments to them.
Your down payment also has an impact on loan approval. A higher down payment will make it easier for you to get a loan because it means you are borrowing less. It also means you already have equity in the home and are therefore more invested in it, so lenders believe you’re less likely to miss payments and default on the loan. Because a larger down payment lowers your loan-to-value (LTV) ratio, it makes you less of a risk to the lender.
But perhaps the most important factor that lenders consider is your income, specifically how much and if it’s stable. A steady income makes you less of a risk to the lender, and a higher income means you will qualify for a larger loan.
Your lender will closely examine and scrutinize your finances. Due to the “ability to repay” provision, lenders are duty-bound to only give loans to people they believe can pay them back. The purpose of this is to end predatory lending to borrowers who can’t actually afford to repay the loan.
Lenders will consider not only your total income but also your income sources and their regularity (salary, investments, etc…). Many lenders do consider government assistance as a valid, steady income source as long as it is ongoing and reliable and not short-term or expiring soon. But all lenders are different, so it’s important to research different lenders to see what they accept as income.
Forms of government assistance that lenders generally accept are social security; government pensions, long-term disability; long-term foster care payments (if you’ve fostered for two years); and VA benefits. You may even be able to use unemployment benefits toward your income, but it depends. If you lost your job recently, unemployment will likely not be accepted as a form of income. But if you’re a seasonal worker, for example, who can document that you routinely go on unemployment every year between jobs or in the off-season, then unemployment very well may be accepted. Similarly, short-term disability may not be accepted by lenders depending on how soon it expires.
But if you’re receiving government benefits and are concerned about your loan eligibility, there are things you can do to increase your chances of getting approved.
Save money - To ensure that you can afford to pay back the loan, lenders will scrutinize your finances and go over every aspect of your financial life, including bank statements and pay stubs. If you cut back on your expenses and save money each month, you will look like a much more responsible loan candidate.
Take out a smaller loan - The less you need to borrow, the more likely you are to get a loan. And at the same time, the less you borrow, the more likely you are to be able to pay it back. A smaller loan means smaller monthly payments, less interest, and lower total money due to be repaid. You can help yourself take out a smaller loan in a number of ways, like saving up for a bigger down payment, applying for grants, buying a less expensive home, etc…
Apply jointly - If you are unmarried, you don’t have to apply for a loan yourself. You can actually apply with up to three people, and your joint income will be considered instead of your income alone. This could get tricky, of course, if one party stops making payments or if you can’t agree on other issues relating to homeownership and maintenance. But it is an option you should be aware of.
What if you’re low-income?
If you are receiving benefits and can afford a loan, you should be eligible. But many times, people on government assistance are low income and may not get a loan, because lenders believe they can’t afford to pay it back. If you fall into this category, you may still be able to get a loan, as there are many loan programs for low-income prospective homebuyers. These include FHA home loans, USDA home loans, VA home loans, Good Neighbor Next Door, HFA home loans, Mortgage Credit Certificates, Down Payment Assistance loans/grants, and HomeReady and Home Possible loans.
What if you’re disabled?
There are also loan programs for people with disabilities (and receiving disability benefits), as studies show that disabled people are more likely to have trouble making ends meet than their able-bodied counterparts. These loans help not only with buying/refinancing a home but also with necessary home modifications/renovations related to the borrower’s disability. Many of these loans are mentioned above. Plus, disabled and low-income homeowners can contact Habitat for Humanity, which builds new homes and renovates existing homes for eligible homeowners in need.
The Bottom Line
You can qualify for a mortgage while receiving government assistance, but it’s not a guarantee you will get one. Lenders consider your total income (including salary, investments, and any assistance) and determine if you can afford a loan and how much. Lenders have different requirements and accepted forms of income, so be sure to do your research when finding the right lender and loan program for you.