If you’re tired of renting but are having trouble getting a mortgage because of your low income.
You’re not alone. Thankfully there’s hope.
We will explore 6 different types of low-income home loans designed to help homebuyers with low-to-moderate income families.
RATE SEARCH: Get Approved for a Mortgage
A long time ago home loans were only for people with great credit, high-income, and a large downpayment. The Federal Housing Administration was created in 1934 to encourage homeownership in America.
Some of the greatest benefits of FHA home loans is they come with only a 3.5% down payment, people with poor credit can qualify, and people with low income can qualify.
The FHA doesn’t actually make the loan, but it insures it—as long as the loan meets its specific standards. When a bank underwrites a loan that meets those standards, then, it has a guarantee of protection against loss.
FHA Eligible Properties
- Single-family homes
- Muti-family housing (2-4 units)
- Mobile and manufactured homes
- Condos and town-homes
FHA loans also have some key aspects to them that make them an especially attractive to first-time homebuyers and those of us who’ve hit some hard times:
- Buyers can have FICO scores as low as 500, with a reasonable explanation for the low number
- Higher DTI ratio limits
- Short sales, foreclosures, or bankruptcies aren’t automatic disqualifiers (IF home buyers are part of the Back to Work program)
- Loan rates are generally 3.5 percent , except for a few FHA-approved condos
- Down payments may come from “gift funds” or even the FHA itself, which offers down payment assistance
- Fix-rate mortgage and ARM’s available
FHA Loans: Speak to a lender and check current rates
This program, formally known as Section 502, is now commonly called a Rural Housing Loan. This low-income housing loan is meant to reach “low-to-moderate-income homebuyers,” and that includes people living in suburban and small-towns as well.
USDA rural development loans are specifically for low-to-medium income families. In order to qualify your household income cannot be more than 115% of the average area median income.
The typical maximum household income is $73,600, and up to $103,400 in a high cost rural area of the U.S. There is no maximum DTI ratio either. Among the aspects of USDA loans are…
- For low-income families where household income does not exceed 115% of the median income for the area.
- No maximum DTI ratio
- Eligible home repairs and upgrades can be included in the loan amount
- Lowest PMI fee of any mortgage type (0.35%)
- No surprises at closing: the guarantee fee is added to the total loan balance, and PMI is collected monthly
- Rates often lower than comparable, low- or no-down-payment mortgages—getting you into a house “on the cheap” better than any other program
FHA 203k Home Renovation Loan
An FHA 203k mortgage is a type of home rehab loan that gives you one loan to buy a property and borrow money to make repairs and renovations. You just need a 3.5% down payment and you can borrow additional funds with a streamline loan, unlimited cash for a standard 203k.
The loan requirements are similar to FHA, so low income families can qualify. However, since the lender is loaning the borrower more money than the purchase price you must have a good credit rating to qualify.
A VA loan is a no-money-down mortgage program available to members of the U.S. military and surviving spouses. These loans have no maximum DTI requirements and do not require mortgage insurance. A VA home loan is the cheapest way to become a homeowner as a Veteran.
Active duty and honorably discharged military personnel
Members who’ve spent at least six years in the Reserves
Surviving spouses of service members killed in the line of duty
You don’t have to have perfect credit—even a bankruptcy isn’t an automatic disqualification. Because there is no maximum DTI requirement, lenders are able to push the DTI ratio much higher than traditional loans. A DTI ratio as high as 70% has been seen in some cases.
ReadyBuyer™ HomePath Mortgage
The HUD HomePath mortgage program by Fannie Mae is available from many lenders in the U.S., and represents a truly innovative approach to home underwriting.
It considers the income of everyone living in the house as part of the qualification process. This helps you by increasing your debt-to-income ratio using everyone in the household, without them having to be on the mortgage..
With the ReadyBuyer HomePath mortgage you can purchase any HUD home on the HUD HomeStore website with just a 3% down payment. HomePath will also give you a 3% credit you can put towards closing costs after you attend a mandatory homebuyer education course.
This low income home loan includes…
- Parents who live with you and earn income
- Children who live with you, earn income, and contribute to the household
- Boarders who rent from you, even in a non-zoned rental unit, and even if they pay in cash
The Conventional Loan 97
N.B.: The Conventional 97 program was discontinued for a brief time in December of 2013, then reinstated by the Federal Home Financing Agency in 2014. This information reflects its current status.
If you’re looking to save wherever you can—and who isn’t? The Conventional Loan 97 offers a 3 percent down payment, might be just what you’re looking for.
It saves you .5 percent over the FHA loan and is offered by both Fannie Mae and Freddie Mac lenders.
As if that’s not good enough news, it gets better—this mortgage allows you to use gift money for the entire down payment, as long as the gifter is related to you.
This means by blood, marriage, legal guardianship, domestic partnership, or even a fiancé or fiancée.
You can utilize the Conventional 97 with these qualifications:
- The loan must be under $424,100, even in high-cost markets
- The subject property must be a single-unit dwelling
- The mortgage must be fixed rate—no ARMs
It’s worth noting that while the loan isn’t usable for multi-unit dwellings, the Conventional 97 CAN be used for refinancing a presently owned home. And there are no particular credit score requirements beyond those you’d expect to see for a typical conventional home loan.
You don’t need 20% down to get a mortgage
You don’t need a huge down payment to get a mortgage anymore. Gone are the days where you had to have a very high income, credit score, and down payment.
There are many low-income home loan programs out there that make buying a house possible. Certain Government programs allow for higher debt-to-income ratios than traditional mortgages.
The 5 mortgage types we’ve discussed all have a low, or no down payment.
- VA loans – No down payment
- USDA loans – No down payment
- FHA loans – 3.5% down
- 203k FHA loans – 3.5% down
- HomePath loans – 5% down
- Conventional 97 loan – 3% down
Credit Scores needed for low income home loans
Your credit score plays a huge role in determining how much house you qualify for. The higher your credit score, the higher the maximum DTI ratio you will be able to have. For low-income borrowers with a 680 FICO score or higher will have an easier time becoming homeowners.
FHA Loans are the only type of mortgage programs for people with a bad credit score. Borrowers with a 500-579 score can qualify with a 10% down payment. However, passing underwriting with a score in this range is very unlikely.
If you have a 580 or higher credit score, you have much better odds of getting approved for an FHA loan. If you do need to work on on your credit check out our article 6 things you can do to build your credit fast.
Minimum credit score requirements
- VA Loans – 620 score (580 score in some situations)
- USDA Loans – 640 score
- HomePath Program – 620 score
- Conventional 97 – 620 score
- FHA Loans – 580 score
Improve Your Credit Score before Applying
In order to increase your chances of getting approved for a home loan you need to ensure your FICO scores are maximized. There are a few simple things you can do to increase your credit rating before you apply for a mortgage.
Pay down the balance on your credit cards – The amount of available credit you’ve used up on your credit accounts make up a whopping 30% of your overall credit rating. So if you have high credit card balances you can improve your score significantly by just paying down the balance to under 15% of the credit limit.
Hold off on applying for new credit – New credit or loans and inquiries make up 10% of your FICO credit score. If you know you’ll be applying for a mortgage loan then you should hold off on applying for and opening new credit lines and loans.
Down payments can be a gift
The good news is that all of these mortgage programs we discussed allow you to use gift funds for the down payment. A friend or relative can gift you 100% of the down payment amount you need for the loan.
The Donor will need to show documentation for where the gift came from, and provide a gift letter stating they do not expect to be reimbursed or repaid for the money they are giving.
Low Income Home Loans Debt-to-Income Ratios
Your debt to income ratio, or DTI for short. Is the amount of debt payment you have, compared to your income.
For example, if you make $2600 a month and you have a $300 car payment and your estimated mortgage payment is $1000. You would have a total of $1300 in monthly payments compared for $2600 monthly income, giving you a DTI ratio of 50%.
Conventional mortgage loans don’t allow a lot of wiggle room when it comes to a borrowers DTI. Most conventional loans have a 40% DTI maximum, making it difficult for low-income borrowers to qualify.
However, thanks to the Government housing programs, there are low income home loans designed to help low income families get approved for a home loan.
First-Time Homebuyer Grants and Down Payment Assistance
The HUD website has various grants and programs for first-time buyers and low-income families. Local City and County websites sometimes also have first-time home buyer grants and down payment assistance programs available.
Check out your local county website to check for any type of low-income housing assistance programs, down-payment assistance and grants.
Good Neighbor Next Door
This is a mortgage program also from HUD that gives teachers, police officers, and firefighters 50% off HUD owned properties with a $100 down payment. This assistance program was developed to help teacher and officers become homeowners.
You can search for properties in your area at the HUDhomestore website.
Dollar Home Program
When a home that is purchased with an FHA loan is foreclosed on, HUD becomes the new owner of the property. These HUD homes are listed for sale on the HUD Home Store website. Any properties that have been listed on the site for more than 6 months become available to local Governments.
Local Governments offer the low income homes to families for just $1 to help revitalize their community. You can view these eligible HUD homes on the HUD website.
Attaining Your Dream…
Purchasing your dream home may be more reachable than you think. There are plenty of low income home loan programs that help families become homeowners. Home buyer grants, programs, and down payment assistance services are also available from different sources.
If you want to purchase a home but are worried you will not be able to qualify because of your income. No need to fret, there are many options for you.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.