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What Sort of Low-Income Home Loans Are Available?
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Having a low income doesn’t automatically disqualify you from buying a home. In fact, there are many programs available to help you reach the goal of homeownership. Depending on other important factors such as your credit score, existing debt, location and profession, you may qualify for a home loan through one of the low-income home loans detailed in this article.
What are low-income home loans?
Low-income mortgages are loans tailored to address the issues that many low-income homebuyers face: debt, low credit and the difficulty of saving a large down payment. Typically low-income home loan programs offer to ease this burden through some combination of:
- Lower down payment requirements
- Flexible credit requirements
- Reduced closing costs
- More affordable interest rates
- Discounted mortgage insurance
In many cases, low-income home loan programs actually bar people with too high of an income from participating.
Right now, mortgage rates are currently rising, and the median home price sits at around $455,000. That may sound intimidating, but here are six loan programs for low-income buyers that could be your ticket to homeownership, even in today’s tough market.
Fannie Mae HomeReady loans
Best for: low-income buyers struggling to come up with a down payment.
The HomeReady mortgage program from Fannie Mae offers low-income home loans to prospective homebuyers with limited cash for a down payment. The guidelines are more flexible to make it easier for borrowers to qualify, and monthly insurance can be lower than with conventional loans. Buyers are also allowed to use gifts or grants to cover their down payment and closing costs.
Both first-time homebuyers and repeat buyers are eligible. If all borrowers on a loan are first-timers, at least one borrower must meet the homeownership education requirement. They can do so by completing an online course on the Framework website.
Freddie Mac Home Possible® loans
Best for: low-income buyers with limited down payment funds and at least a 660 credit score.
Freddie Mac’s Home Possible® mortgage program is similar to HomeReady, but requires a slightly higher credit score. Otherwise, it offers similar benefits: discounted mortgage insurance, flexible guidelines that help more people qualify, a low down payment and the ability to use a gift towards the down payment. You can even use sweat equity to cover your entire down payment and closing costs.
Both first-time and repeat homebuyers can qualify. At least one borrower must complete a homeownership education course if all borrowers on a Home Possible loan are first-time buyers.
Best for: buyers with a credit score under 620.
The Federal Housing Administration (FHA) insures FHA loans funded by approved lenders. Because they have looser requirements, FHA loans can be a good option for homebuyers who can’t reach the 620 credit threshold required by conventional loans or who are struggling to afford the closing costs on a loan.
You could qualify for an FHA loan with a credit score as low as 500, but you’ll be required to make a larger down payment. All borrowers are required to pay upfront and annual mortgage insurance premiums, no matter their credit score or down payment amount. FHA borrowers putting the minimum 3.5% down pay FHA mortgage insurance for the life of the loan.
Good Neighbor Next Door program
Best for: public servants who are willing to live in a revitalizing neighborhood for at least three years.
The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) allows homebuyers in eligible public service careers the opportunity to purchase a HUD home at a 50% discount. You don’t have to use an FHA loan to buy your home under the program, but if you do, the minimum required down payment is only $100.
Best for: veteran homebuyers and their families.
The U.S. Department of Veterans Affairs (VA) offers a mortgage program to help veterans, service members and surviving spouses purchase homes. The VA is not a direct mortgage lender, but it does guarantee a portion of the loan so borrowers can receive more favorable loan terms like a lower interest rate.
VA loans don’t have a minimum required down payment or mortgage insurance requirement. However, they do charge a VA funding fee, which varies depending on your down payment amount. The loans also limit the amount you can be charged for closing costs, and the seller may pay a portion of the closing costs. Additionally, as of 2020, there are no VA loan limits for borrowers with full VA entitlement.
Best for: low- to moderate-income buyers in rural areas.
The U.S. Department of Agriculture also insures low-income home loans provided by approved lenders. USDA loans cater to homebuyers with a modest income and don’t require a down payment.
Tips for buying a house with a low income
Increase your income or lower your debt If you have the time, pick up a side hustle to increase your income to save up for closing costs and a down payment. You should also prioritize paying down your outstanding debt, especially credit card balances, which can help lower your DTI ratio.
Look for homebuying assistance Check with your state’s housing finance agency for available homebuying assistance programs, including grants or loans to help cover your down payment or closing costs.
Get a cosigner Conventional and government-backed loan programs allow cosigners, which means that you can add someone else’s income to your own in order to qualify for a mortgage.
Get a mortgage preapproval Home sellers are likely to take you seriously if you have a mortgage preapproval when you put in a purchase offer. A preapproval states how much a lender might be willing to lend you, based on a review of your overall financial picture.
Choose your real estate agent wisely Focus on finding a real estate agent who is knowledgeable about local housing conditions, as well as local and national homebuying programs for low-income borrowers.