How To Get A Mortgage As A Low-Income Borrower

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A low-income home loan could be your answer to homeownership if you have below-average earnings. Unfortunately, insufficient income is why banks and lenders reject conventional mortgage applications. However, several home loan programs have great financing options to make purchasing a home possible for low-income families. 

Let’s face it—buying a home is tough at the best of times. Even with a sufficient down payment, a mortgage lender will refuse a home loan application if they think you cannot afford the monthly mortgage payments. In addition, if you are a first-time homebuyer, qualifying for a home loan can seem impossible due to the large deposit. If these scenarios affect you, what options are available to afford to buy a home?

Popular low-income home loan programs include USDA, FHA, VA, Home Possible, and HomeReady. These programs have options like zero to three and a half percent down payments, less stringent minimum income requirements, or lower credit score thresholds. Therefore, a low-income home loan may suit you, depending on your situation.

This article explains the types of home loans for low-income households. Additionally, you will learn about the loan eligibility requirements to find one that will help you become a homeowner. 

What are Low-Income Home Loans?

Low-income home loans are mortgage programs to help more people own a home. The loan options remove the financial barriers that low-income individuals face — poor credit history, high debt-to-income ratio (DTI), and saving for a sizeable down payment. Therefore, home loans for low-income lower the eligibility requirements compared to conventional loans.

Your household income limits must meet eligibility requirements to qualify for a low-income loan. Here are some standard features of home loans to help low-income borrowers become homeowners:

• Closing cost assistance
•  Lower interest rates than conventional mortgages
•  Lower down payment requirements or even no down payment
•  Lower credit score requirements
•  Discounted or no private mortgage requirements

It’s good to remember that low income is not the main factor in qualifying for a loan. Lenders typically assess your debt-to-income ratio (DTI). In other words, you use the amount of your income to pay debts. Most lenders consider a DTI below 43% acceptable. However, you should aim for a lower percentage if you have a low income. 

Related: Ultimate to home loans.

How to Buy a House with Low Income

If you are on a low income, the best way to buy a house is to search for a suitable mortgage and understand exactly how to calculate your mortgage payment. However, you must still meet specific requirements to qualify for a home loan. And your finances must be to get approval.

Here are five tips for buying a house with a low income:

• Improve your credit score: Work hard to maximize your credit score before applying for a low-income home loan. The higher the score, the better the mortgage rate you can get. Ways to boost your credit score include paying off debt, lowering credit card balances, and paying bills on time. 
•  Save for a down payment: Even if you qualify for a low-income loan with a three percent or three-and-a-half percent down payment, putting more down makes sense. A high down payment shows the lender you are committed to making loan payments. Remember, you may still have to pay closing costs and have cash in reserve in case of a temporary loss of income. 
•  Lower your DTI ratio: Reducing debt liabilities can help you qualify for a home loan on a low income. Therefore, try to lower debt as much as possible. A general rule is that the mortgage payment should be less than 28% of your pre-tax income. 
•  Stick to a budget: Purchasing a home is a long-term financial commitment. Therefore, it’s a good idea to develop responsible buying habits. Remember, you must budget for repairs and maintenance and afford monthly payments. 
•  Use a co-signer: You can increase your chances of qualifying for a low-income home loan by using a co-signer. However, a warning: the co-signer becomes responsible for the loan if you cannot make on-time payments. Therefore, this should only be used as a last resort.

Low-Income Mortgage Loan Programs

After getting your finances in order, you can start searching for suitable home loans and low-income housing programs. Let’s look at ten popular options to secure financing if you are a low-income buyer. 

FHA loans

A Federal Housing Administration (FHA) loan is a government-backed mortgage loan program for low-income borrowers. This loan type allows purchasing a home with a minimum 3.5% down payment and a credit score between 500 and 620. You may also qualify for lower closing costs.

There are a few caveats to know about FHA loans:

• You will need to make a larger down payment of at least 10% if your credit score is between 500 and 579
•  Your income cannot exceed FHA loan limits; according to the FHA, this is $472,030 for a one-unit home
•  An FHA loan can only be used to buy a home that is your primary residence.

Who is an FHA loan for?

An FHA loan is a good option if you have a credit score between 580 and 620 and want to put down a minimum of 3.5% of the purchase price when buying a home. A credit score between 500 and 579 requires a 10% down payment.

Good neighbor next door

Do you work in public services and want to purchase a discounted home? If so, the Good Neighbor Next Door Sales program can help you buy a HUD home in specific revitalization areas. Buy an eligible home at a 50% discount with a minimum down payment of $100.

Here are the requirements of the Good Neighbor Next Door program:

• The property must be in a HUD-approved area
•  You must live in the home for a minimum of three years
•  Eligible borrowers must be employed full-time in an eligible profession

Who is a good neighbor next door loan for?

This loan type is a good option if you work in public service organizations like teaching, law enforcement, and firefighting. You can purchase a HUD home up to half-price with a minimal down payment. 

HomeReady and home possible

Fannie Mae and Freddie Mac are government-sponsored loan programs providing first-time and repeat buyers with low-income home loans. The loan programs make saving for a down payment easier and can help cover closing costs. Unlike FHA loans, you must have a good credit score to be an eligible buyer.

Freddie Mac and Fannie Mae loans allow you to finance up to 97% of the home’s sales price. Another benefit of these loan types is that both programs have discounted mortgage insurance. However, first-time homeowners must attend homebuyer education classes.

Here are the requirements for Fannie Mae loans:

• A minimum credit score of 620
•  Your income can be at most 80% of the median income for your area.
•  Have enough cash to put down a minimum of three percent.

Here are the requirements for Freddie Mac loans:

• A minimum credit score of 660
•  Make a minimum down payment of three percent
•  Earn up to 80% of the area median income (AMI)

Homeownership voucher program

Also called Section 8, the Housing Choice Voucher (HCV) homeownership program allows people in rental housing to use their vouchers for purchasing a home. In addition to buying a home, you can receive assistance to pay for homeownership expenses and ongoing costs. These include property taxes, principal and interest, and mortgage insurance premiums. 

Here are some requirements for the HCV program:

• You must meet employment and income requirements and currently receive rental assistance
•  You are a first-time homeowner
•  No previous mortgage default while getting assistance in the HCV program

It’s important to note that every Public Housing Agency has an HCV program.

Who is the housing choice voucher homeownership program for?

If you already receive Section 8 Vouchers, you can use them to buy your first home. First, however, check with your local Public Housing Authority if they run the scheme.

HUD homes

An option to purchase a home on a low income is to search for HUD Homes for sale. The Department of Housing and Urban Development auctions off homes purchased with an FHA loan but then foreclosed. As a result, you can buy a home for well below its market value. 

However, there are three things to remember when purchasing a HUD Home:

• The homes are sold “as-is,” which means that they may need a lot of repairs
•  Depending on the condition, the repairs and purchase cost could be more than buying a home through an estate agent and conventional mortgage lender
•  Eligible properties must be listed on the HUD Homes website

Who is a HUD home for?

A HUD home is a good option if you cannot afford a home on the traditional market. However, arrange a home inspection first to ensure you can afford the repairs. 

Related: What is HUD and how to buy a HUD Home?

VA mortgages

The Department of Veterans Affairs offers mortgages with flexible terms to increase buying power for low-income buyers. VA loans have a zero percent down option, lower interest rates, lenient credit requirements, and lower DTI requirements to make the loan more affordable. Also, you don’t have to pay monthly mortgage insurance. 

To qualify for a VA loan, you or a family member must currently serve or have served in the armed forces. The VA does not lend directly but guarantees a portion of the loan from an eligible private lender. 

Here are a few requirements for VA loans:

• A Certificate of Eligibility from the military
•  Have enough cash to pay the VA funding fee and closing costs
•  A minimum credit score of 620

Who are VA loans for?

A VA mortgage is an excellent option if you or a family member are veterans or on active duty. The loans provide an affordable alternative to buying a home with low monthly mortgage payments.

USDA mortgages

The United States Department of Agriculture (USDA) has loan assistance programs for families living in rural and some suburban areas. The Government-backed loans don’t require a down payment, making them an attractive option for low- or moderate-income households. Sometimes, the interest rates can be as low as one percent.

Like all home loans for low incomes, there are income eligibility and other requirements to borrow money. For example, you must be without “decent safe and sanitary housing” and be ineligible to qualify for a conventional mortgage. Additionally, you cannot use the direct loan to purchase a home above the area loan limit. 

Here are a few requirements for USDA home loans:

• There is no minimum credit score; however, it’s best to have at least a credit rating of 640 credit rating
•  Your household has a monthly income limit of less than 115% of the county median household income for the area
•  The home must be located in a designated area found on the USDA website

Manufactured Home Loans

The FHA insures loans from private lenders to purchase new or used manufactured homes. There are two types of loans — Title I and Title II loans. One is a loan to buy a manufactured home, and the other is to buy the house and the land it sits on.

For lower-income borrowers, a manufactured home is cheaper than a traditional home. Therefore, qualifying for a home loan is easier as you need a lower down payment. Additionally, several FHA-approved lenders offer attractive interest rates. 

Here are some requirements for a manufactured home loan:

• The home must be your primary place of residence
•  It must be on a suitable homesite that meets local standards regarding sewage disposal and water supply
•  You must meet credit score requirements and make a down payment

Who is a manufactured home loan for?

Buying a factory-built residence can be an affordable housing option if you struggle to afford mortgage payments for a regular home. 

State and local loan programs

Suppose you have explored low-income home loan options and need help securing a mortgage. In that case, it’s worth exploring loan programs that local government agencies or nonprofit organizations offer. For example, some states have down payment assistance schemes or mortgage credit certificate programs for eligible low-income households.

In Summary

A below-average income does not mean you cannot qualify for an affordable home loan. But, of course, finding a suitable loan with a minimal down payment, low-interest rates, and flexible terms take more work. And home loans for low-income families usually have stricter eligibility requirements. But the good news is that there are many options to get financial assistance to become a new homeowner.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.