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What Sort of Low Income Home Loans Are Available?

low income home loans

At the rate home prices are climbing these days, it’s easy to believe there’s no way you would be able to afford a mortgage on a low income. Many renters living paycheck to paycheck may find it difficult to save up the recommended 20% down payment for a mortgage in the first place.

But earning a low income doesn’t disqualify you from achieving a key component of the American dream. In fact, a recent report found one in four home purchase loans went to low- or moderate-income borrowers in 2017.

Depending on your credit score and what kind of home you want to buy, there may be a low-income home loan that can help you purchase a home. We rounded up a list of several low-income loans and other assistance options you may want to consider before you totally psych yourself out of pursuing your dream of homeownership.

Home loans for low-income borrowers

There are many government programs that exist to help promote homeownership for all Americans. Nonconventional mortgage loans are insured by a government-sponsored entity. The Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Department of Agriculture (USDA) offer government-backed housing loans. In addition, government-sponsored Fannie Mae and Freddie Mac also offer programs targeting borrowers who may have a hard time coming up with a down payment. The programs assist low-income Americans and other marginalized groups struggling to achieve homeownership.

Here’s a quick overview of how they work:

FHA loans

The Federal Housing Administration provides mortgage insurance on single and multifamily home loans by approved lenders. The guarantee lessens lenders’ risk so that borrowers who would otherwise fail to qualify for a loan because of their credit score or debt-to-income ratio (DTI) are able to receive mortgage loans and become homeowners.

Because they have looser requirements, FHA loans can be a good option for first-time homebuyers struggling to save 20% down payment and for those who may not qualify for a conventional mortgage because of poor credit. The federal agency is the largest mortgage insurer in the world and has insured more than 47.5 million properties since it was created in 1934.

Down payment requirement: The FHA loan program allows borrowers with credit scores as low as 580 to put down as little as 3.5% for a down payment. Borrowers with credit scores between 500 and 579 are required to put down at least 10% for a down payment.

Eligibility: Borrowers must have a minimum 500 FICO credit score to qualify for an FHA loan. Applicants are generally required have a debt-to-income ratio 43% or less and steady income to qualify for the program. Borrowers with DTIs above 43% and up to 50% are required to meet compensating factors like verified and documented cash reserves and residual income for qualification. Applicants must also use the home as a primary residence.

Mortgage Insurance Premium (MIP): Borrowers are required to pay upfront and an annual mortgage insurance premium if approved for an FHA loan.

The upfront payment is 1.75% of the loan amount and is included in closing costs. If you borrow $200,000, for example, your upfront MIP will be $3,500 ($200,000 x 1.75% = $3,500).

The annual premium is a little more complicated. According to the Fed, the amount is recalculated each year as a percentage of the average outstanding balance on the loan. Your annual premium is based on how long your loan term is, how much you borrow and your loan-to-value ratio (LTV) — the size of the loan compared to the value of the home. The annual premium is broken up and collected with your monthly mortgage payment.

Restrictions: The FHA has a lending limit, or maximum loan amount it will insure. The limit is updated annually and influenced by the location of the home and type of home as well as Fannie Mae and Freddie Mac conventional loan limits. You can find the lending limit for your state here on the FHA website.

How to apply: The FHA has several different types of loans available. You must apply through an FHA-approved lender. Borrowers can compare quotes from top FHA-approved lenders at LendingTree.

Compare FHA Loan Rates

HomeReady® loans

HomeReady® loans from Fannie Mae are designed for low- to moderate-income prospective homebuyers with limited cash for a down payment. The loans allow more flexibility in underwriting to make it easier for borrowers to qualify.

Loan terms: HomeReady® loans require borrowers make at least a minimum 3% down payment. Borrowers who put down less than 20% are required to pay mortgage insurance. However, unlike with FHA loans, borrowers can request to cancel the insurance once the equity in their home reaches 20%. The mortgage insurance premium will depend on the borrower’s credit score and LTV.

Eligibility: Borrowers must have a minimum 620 FICO credit score and meet the income eligibility for the property location to be eligible for a HomeReady® loan. For properties in low-income areas, there is no income limit. For all other properties, the borrower may not earn more than the median income in the area. Borrowers can look up the property to determine if they meet income eligibility requirements for the area here.

To qualify for a HomeReady® loan, at least one borrower on the application must meet the mortgage homeownership education requirement. They can do so by completing a Framework online education program for a $75 fee or by going through housing counseling with an HUD-approved nonprofit housing counseling agency.

Flexibility: HomeReady® loans allow borrowers some underwriting flexibility that may make it easier to qualify for a mortgage. HomeReady® loans do not require borrowers to use a minimum amount of personal funds to pay for the down payment and closing costs. Instead, borrowers who use these loans can have multiple sources of funding like gifts, grants, Community Seconds® mortgages and cash on hand.

HomeReady® loans are also an option for borrowers with no credit history, as lenders are permitted to use 12 months of rental or other monthly payments to determine eligibility. Borrowers are also permitted to have a non-occupant borrower on the loan to qualify for better loan terms or a larger loan amount.

How to apply: You can apply for a HomeReady® loan through any Fannie Mae lender.

Home Possible® loans

Home Possible® and Home Possible Advantage® loans are available through Freddie Mac. The loans are designed for low- to moderate-income borrowers with limited funds for a down payment.

Loan terms: The Home Possible® mortgage program offers two types of loans: Home Possible® and Home Possible Advantage®.

Home Possible®

Borrowers can use Home Possible® loans to finance up to 95% of the cost of a primary residence. Borrowers are required to put down at minimum a 5% down payment. Borrowers can get fixed-rate and adjustable-rate mortgages through the program. Borrowers are required to use the home as a primary residence. Those with no credit score can still qualify for this loan.

Home Possible Advantage®

Home Possible Advantage® loans can finance up to 97% of a single-unit property or condo. Borrowers must use the home as their primary residence. Home Possible Advantage® loans require borrowers contribute at least 3% of the down payment and closing costs.

Eligibility: A 660 credit score is generally required. Eligible borrowers must meet income eligibility requirements for the area where the property is located to qualify for a Home Possible® or Home Possible Advantage® loan. Prospective borrowers can use this tool to find the income limits for the property they are interested in financing.

Flexibility: Both loans boast cancelable mortgage insurance after the property’s equity reaches 20%. Both loans also allow borrowers to use multiple sources of funding to come up with their down payment. For example, borrowers can use funds from family, employer assistance programs or even secondary financing.  

How to apply: You can apply for a Home Possible® loan through any Freddie Mac lender.

VA loans

The VA provides a home loan program to assist veterans, servicemembers and surviving spouses purchase homes. The VA is not a direct mortgage lender but rather it guarantees a portion of the loan so that borrowers can receive more favorable loan terms like a lower interest rate and down payment.

Loan terms: The VA guarantees loans up to 100% of the home’s value. VA loans don’t have a minimum down payment or mortgage insurance requirement. However, they do charge a VA funding fee. The loans also limit the amount you can be charged for closing costs, and the seller may pay closing costs. Lenders are not allowed to penalize borrowers for paying off the loan early.

Eligibility: Applicants must meet satisfactory credit and income requirements, and hold a valid Certificate of Eligibility to be eligible for a VA loan. Applicants can apply for a COE online, through a lender or by mail.

Restrictions: Applicants must intend to use the home as a primary residence. The VA doesn’t set a limit on how much you can borrow to finance your home but the agency applies Federal Housing Finance Agency loan limits to determine the amount of loan liability the agency can assume on your behalf.

How to apply: You can apply for a VA home loan online, through a lender or by mail.

Compare VA Loan Rates

USDA loans

The U.S. Department of Agriculture offers single-family direct home loans and guaranteed loans to low- and moderate-income borrowers through its Single Family Housing Direct Home Loans and Single Family Housing Guaranteed Loan programs, respectively.

The Single Family Housing Direct Home Loan

Loan-specific terms: The Single Family Housing Direct Home Loan program provides a payment assistance subsidy that reduces the mortgage payment for a period of time determined by the adjusted family income.

As of July 2018, the interest rate for Single Family Housing Direct Home Loans is 3.75% for low- and very low-income borrowers. After considering payment assistance, borrowers can receive a loan with an interest rate as low as 1% and up to 38 years to repay the loan. No down payment is required for Single Family Housing Direct Home loans.  

Eligibility: Applicants for the Single Family Housing Direct Home Loan program must have an adjusted income at or below the applicable low income limit in their area to meet minimum requirements for a loan. Applicants must also meet the following requirements for a Single Family Housing Direct Home Loan:

  • No access to decent, safe and sanitary housing
  • Unable to obtain a loan from other resources
  • Agree to use property as your primary residence
  • Be legally able to handle the loan obligation
  • Meet citizenship requirements or eligible noncitizen requirements
  • Not be suspended or debarred from participation in federal programs

Restrictions: Generally, homes in rural areas with populations less than 35,000 are eligible for a USDA loan program. Borrowers who use a Single Family Housing Direct Home Loan may not borrow more than their area’s loan limits allow and the home must not have a market value higher than the applicable loan limit. The home must be generally 2,000 square feet or less and cannot have an in-ground swimming pool. The property cannot be designed for income-producing activities like farming.

How to apply: You can apply for a Single Family Housing Direct Home Loan through your local Rural Development office.

The Single Family Housing Guaranteed Loan

Loan-specific terms: The Single Family Housing Guaranteed Loan program guarantees up to 90% of a home loan in a rural area to approved lenders. The loan guarantee does not provide any mortgage rate benefit to the borrower.

Eligibility: Applicants for both USDA home loan programs must:

  • Meet income eligibility requirements (determined based on area and number of members living in the home)
  • Agree to use property as your primary residence
  • Be legally able to handle the loan obligation
  • Meet citizenship requirements or eligible noncitizen requirements
  • Not be suspended or debarred from participation in federal programs

How to apply: You can apply for a Single Family Housing Guaranteed Loan through an approved lender, or get help finding a lender through your state’s guaranteed loan coordinator.

Tips for prospective buyers with a low income

Buying a home using a nonconventional loan is different than buying a home using a conventional loan as you may need to follow different rules and meet other kinds of requirements. Below are a few tips that may be helpful to keep in mind on your way to homeownership.

Look for a real estate agent with the experience you need

You want as much help on your side as possible. If you are planning to purchase a home with a low income, you should find a real estate agent who is knowledgeable about resources available for low-income homebuyers.

Sara Gerrish, a San Antonio-based real estate agent, says a knowledgeable agent can help you work with a mortgage broker or with a nonprofit program that may be able to help you secure grants for a down payment. She adds a good agent may be knowledgeable of local banks and the programs they have available for buyers in your area.

Have your financing ready to go

Gerrish says in today’s housing market with a limited supply of homes available, it’s important to have your financing secured and ready to go when you put in an offer on a property. Find tips on how to get preapproved for a home loan here.

“You just have to work with your agent so that when you find a home you submit a strong offer,” said Gerrish. She recommends writing a letter to the seller explaining why you want the home, and to be patient once the offer is in.

Gerrish notes it’s important to listen to your agent when they talk to you about the market, as they will know more about the demand for homes available in your neighborhood.

Get a housing counselor

If it’s your first time buying a home or if you’re planning to use a nonconventional loan to purchase, it may benefit you to seek the help of an HUD-approved housing counselor. Housing counselors are trained to help explain what documents are needed and create a budget so that you can meet your monthly mortgage payment. The counselor can also help talk you through your mortgage options to choose the best one for your needs.

“Becoming house counseling training-certified makes you eligible for grants and programs that reduce the costs of closing a home purchase,” said Jesse Van Tol at the National Community Reinvestment Coalition, an umbrella organization that works with community leaders and smaller organizations to promote affordable housing and other community-based issues.

On top of that, working with an HUD-approved housing counselor is free. You can find an agency in your community by calling 1-800-569-4287 or visiting HUD.gov.

Shop around

Always, always compare as many loan offers from lenders as possible to make sure you are getting the best terms available on your budget before making a final decision. You can compare FHA loan offers from approved lenders on LendingTree.  

Getting help with a down payment

Saving up for a down payment can be a challenge for a family on a low-income budget. But there’s help for that, too. In addition to resources that can help you qualify for a mortgage, there are state and local government, and nonprofit organizations that offer down payment assistance programs.

Reach out to your state or local Housing Finance Agency (HFA) to find grants and other programs that may be available to help you with your down payment. The city or county you live in may also have additional down payment assistance programs with criteria that align with the median income and home prices in your area. The National Council of State Housing Agencies (NCSHA) has a list of state HFAs.

Don’t forget to check programs with nonprofits or employers in your area. They may have down payment assistance programs with specific requirements you may be able to qualify for.

 

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