How to buy a house if you are a low-income person – Prices of real estate have skyrocketed recently making it increasingly tough for low-income individuals to get a foot on the property ladder. Getting a mortgage for buyers with low income can be challenging concerning credit score requirements, debt-to-income ratio limit and down payment criteria. Fortunately there are mortgage options designed specifically for borrowers belonging to low-income categories so that they can achieve home ownership.
Highlights of this Post
Can I Buy A House With Low Income?
Yes, definitely you can purchase a house and fulfill your home ownership dream by qualifying for special mortgage loans and housing assistance programs. There isn’t any minimum income requirement to buy a house. You just need to showcase your ability to repay your debts on time. The mortgage lender will examine your debt-to-income ratio, credit score and down payment to determine if you can qualify for low-income home loans.
Low-income mortgage programs emphasize addressing the challenges that low-income buyers have to encounter for instance maintaining good credit scores, managing debt or struggling to save for a big down payment. Beyond mortgage many home buyer assistance programs can help you with closing costs and down payment. Many of them are structured as free grants and do not require repayment which makes it easier for you to achieve your dream of becoming a homeowner.
Also read: What is the Average Cost of a Real Estate Attorney?
How Can I Buy A House With Low Income?
Following are the steps that you can take to become an attractive borrower and purchase the property even with limited resources or finances.
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Improve Your Credit Score
Low-income home buyers are unable to acquire a loan because of their low credit scores and need to work on improving their scores by paying bills on time, keeping their credit card usage as low as possible and reducing their debt.
Improving your FICO score is one of the best ways to qualify for low mortgage rates and increase your chance of being approved for a mortgage. If you ever damage your credit history then you need to show a minimum of 12 months of one-time regular payments to improve your score.
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Save For Down Payment
If you do not qualify for a down payment assistance program or no money down mortgage option you need to save money for both down payment and closing costs. For this, you need to determine how much money you have to pay a down payment and create a plan accordingly to save money beforehand.
A lot of loan programs require first-time mobiles to pay no down payment or as little as 3% down on a new home. Those who are putting less than 20% down have to pay certain mortgage insurance fees. Having cash reserves in your bank savings account will assure the lender that you are in a position to pay the monthly mortgage payment.
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Apply For First Time Home Buyer Program
Qualified buyers can receive flexible guidelines on qualifying for first-time home buyer assistance programs. The state and federal government has designed special programs to assist low-income households in attaining their homeownership dream. Unlike conventional loans, government-backed first-time home buyer mortgages provide more flexibility, better interest rates and low credit score requirements.
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Pay Off Debt
By reducing the total amount of debt that you owe at the present time you can reduce your debt-to-income ratio and this will improve your chance of being approved for a mortgage. Further, you can borrow a large amount of money.
You can qualify for low mortgage interest when you have a high credit score and a low debt-to-income ratio and can pay a 3% to 5% down payment to enter a stable income for over two consecutive years.
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Model Your Budget
Owning a property requires more than becoming eligible for a mortgage and paying monthly loan payments. Homeowners have to pay a lot of ongoing costs like property taxes, homeowner insurance, community bills, mortgage insurance, home improvements, ongoing home maintenance, appliance repair and replacement etc.
Sticking to this budget before buying a home and saving money will help you to build a cash reserve and save for down payment or housing costs like utilities and insurance premiums.
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Use Cosigner
It is possible to have a friend, spouse or relative cosign your mortgage loan in some cases. The credit information and financial situation of the cosigner can help to improve your chance of being approved for a loan. When you purchase the property with the cosigner both you and your cosigner will be responsible for making the monthly payments.
Recommended: Low Income Housing Tax Credit (LIHTC)
What Are The Different Types Of Loans For Low-Income People?
Lenders may have their own homeownership assistance program built for low-income borrowers but generally, these types of affordable mortgages are issued or backed through government programs. Some of the popular loans for low-income mortgage applicants are as follows.
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USDA loans
The Section 502 Direct Loan Program by USDA assists low and extremely low-income people living in eligible rural areas in America by offering payment assistance to improve their capacity to repay their mortgage. The amount of assistance received through this program is determined based on the income of the applicant.
The Section 502 Guaranteed Loan Program works through approved lenders to provide low-income households with affordable mortgages so that they can buy a property in eligible rural America.
This program offers a 90% guarantee to participating lenders to reduce the risk of offering 100% loans to rural home buyers. Borrowers are also not required to pay any down payment.
Eligibility Criteria
- You need to demonstrate your capability to manage the debt
- Have a debt-to-income ratio of 41% or less
- The home for which you are applying for a USDA loan should be your primary residence
- Income limitations may vary depending on the location and the program. If you’re applying for a guaranteed loan your income should be less than 115% of the median income for your idea of residence. For direct issue USDA loans your income should be less than 50% of the area median income.
VA Home Loans
VA home loans are not specifically designed for low-income applicants, but they are useful nonetheless. A credit score is not required to participate in the program (although lenders may set a minimum score if they choose). The program does not require a down payment. Financing is available for 100% of the purchase price.
Mortgage insurance is also not required. It is possible to include the VA financing fee in the loan amount. The VA mortgage also allows the seller to pay closing costs of up to four percent of the purchase price. This means that you don’t have to pay anything out of your own pocket to enter a house.
Eligibility Criteria
VA loans are available to veterans, military service members, National Guard members, and reserve members who can meet the minimum service requirements and in some cases their surviving spouses are also eligible to receive VA mortgages.
VA loans provide a wide array of benefits to the borrower for instance no mortgage insurance, no down payment requirement and lower interest rate. These mortgages have lenient debt-to-income and credit requirements as well.
FHA Home Loans
FHA loans are geared toward first-time homebuyers and those with lower incomes, credit scores, and other factors. The Federal Housing Administration supports this program, which makes getting a mortgage easier for low- and moderate-income borrowers. You may qualify for an FHA loan if your debt-to-income ratio is up to 45% and your credit score is as low as 580, depending on the lender you use.
Even those with low credit scores can apply for a mortgage if they are able to contribute 10% of the purchase price. The FHA loan offers these benefits and others, making it one of the lowest payment mortgage options.
Eligibility Criteria
There are certain eligibility criteria which you need to fulfill to qualify for an FHA home loan.
- Minimum credit score of 500
- Minimum down payment of 3.5% of the property purchase price
- Maximum loan-to-value ratio of 96.5% if the credit score of the candidate is 580 or more or else a 90% increase if their credit score is below 580
- Maximum loan amount that may vary as per the type of the property and the cost of living in the particular area
- The home should be the primary residence of the borrower
- The home should be appraised by FHA approved appraiser
HFA Loans
The housing finance agency of every state in America provides financial assistance in the form of affordable mortgages to low-income buyers in partnership with local lenders. HFA Homeownership Programs may vary based on your state however they aim to promote home ownership and boost mortgage affordability and accessibility among first-time home buyers and low-income households.
Eligible borrowers can get first-lien mortgage products from the housing finance agency of the state and get help in the form of low-interest rates and low down payment including down payment and closing cost assistance. The assistance comes in the form of HFA-approved lenders.
Eligibility Criteria
Even though the eligibility criteria to qualify for these types of loans may vary the general requirements state the following:
- The minimum credit score criteria should be lower than the conventional mortgage loan
- Your household income should fall below a certain level and will be determined by your personal income instead of household income
- You should not own any house at the time of settlement
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Other HFA Homeownership Programs
Housing finance agencies not only help people with affordable loans but also provide low-interest rates or zero down payment mortgage products so that low-income families can purchase their homes.
They provide down payment closing cost assistance including mortgage tax credit certificates that enable buyers to claim federal tax credit of 20% to 40% of the mortgage interest that they pay each calendar year.
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Mortgage Certificates (MCC)
Your home buying power can be increased by using Mortgage Credit Certificates (MCCs). Tax credits are based on a percentage of the mortgage interest, if you meet the income requirements. Your qualified income can be increased by this credit when you apply for a mortgage. By doing this, you may be able to qualify for a higher mortgage amount than you would otherwise be able to get.
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Down Payment And Closing Cost Assistance
Housing finance agencies provide down payment and closing cost assistance either in the form of a grant or in the form of a second mortgage loan to help people reduce their financial burden. A lot of housing finance agencies provide assistance that can be used in combination with HFA loans.
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HomeReady and Home Possible Advantage
HomeReady from Fannie Mae and Home Possible Advantage from Freddie Mac come with very low down payment requirements. A gift, grant, or loan from an acceptable source can help you obtain three percent of the home’s purchase price. Low-income homeowners can also qualify for discounts on mortgage insurance. If a buyer has a FICO score of 720 and three percent down, the standard mortgage insurance for a buyer is 0.95 percent per year. Nevertheless, you might only have to pay 0.65 to 0.77 percent when you take advantage of these special programs.
Other Low-Income Home Buying Programs
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HUD Home
A property bought with an effective mortgage that is foreclosed on is auctioned off by the Department of Housing and Urban Development as a HUD home. The homes are sold below market value which makes them an attractive option among first-time home buyers or low-income home buyers.
If you’re unable to purchase a house on the regular housing market due to financial constraints you can opt for a HUD home however you need to be aware of the costly repairs or serious updates that may be required. The transaction can take longer and may be complicated if you need financing.
To qualify for an HUD home you need to approve that the home will be your primary residence for a minimum of 12 months and you also need to showcase you have not purchased another HUD home over the past 24 months.
The housing choice voucher homeownership program from Section 8 program enables low-income families to receive financial support by using the voucher to purchase a home and receive monthly support to meet the homeownership expenses instead of using the voucher towards rent payments.
The US Department of Housing and Development allows housing authorities the discretion to decide whether to implement the homeownership program within their jurisdiction.
You have to meet the employment and income requirements to qualify for assistance unless you are disabled or elderly. They also need to complete a homeownership counseling program and be a first-time home buyer.
The Good Neighbor Next Door Program by HUD assists law enforcement officers, emergency medical technicians, firefighters and teachers to become homeowners.
The Department of Housing and Urban Development provides a discount of nearly 50% from the list price of the property. In return, buyers need to commit to leaving the house for three years as their primary residence. They must choose a property in an eligible area that is deemed to need revitalization.
The 50% discount on homeownership makes it a lot more affordable for low-income families to get a home. The discount is actually in the form of a second mortgage with no payments or interest. When you’re leaving the room for at least three years the second mortgage can be entirely forgiven. You can find the home by visiting the US Department of Housing and Urban Development official website.
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Manufactured Homes and Mobile Homes
It’s hard to find a better deal on a home than a manufactured home. Several conventional mortgage programs are available for financing homes built on foundations approved and encumbered as real estate.
The down payments for manufactured homes may be higher or the terms may be more restrictive. If you finance a manufactured home, HomeReady increases the minimum down payment from three percent to five percent.
The FHA Title 2 program is available to those who purchase mobile homes, since they are not classified as real estate.
Also read: Get Low Income Housing Fast With Minimum Cost
State Or Local Assistance
Low-income home buyers who are unable to purchase a home and in need of assistance can check out the programs that their local or state government offers and cater particularly to low or moderate-income earners. You can also get support from nonprofits and local charities such as Habitat for Humanity.
A lot of state or local housing agencies provide down payment assistance in the form of forgivable loans or grants. You can also check out the mortgage credit certificate program of your respective state that provides tax credit benefits to homeowners. For instance:
Conclusion
Being a low-income earner doesn’t prevent you from becoming a homeowner. As you prepare for your journey towards home ownership, ensure to explore all the available loan options in your area. While, it can be challenging to buy a home on lower than average income. There are a variety of options and programs that assist in making home ownership attainable for individuals with lower wages. By accessing the aforementioned assistance program you can make homeownership more feasible.
The government helps low-income families with a variety of Government Programs for Low-Income Families. Check out our articles at Get Government Grants to learn more.
Frequently Asked Questions
Can I Qualify For Low Income Home Loan?
Even though the lenders do not impose a minimum income criteria to buy a home the overall process can be complicated by a few factors like your financial position to make a down payment or shaky credit scores. Nonetheless, it is possible to qualify for a low low-income home loan.
What Are Low-Income Mortgages?
Depending on the program you are applying to, you may or may not qualify for low-income mortgages. For instance, to qualify for a future mortgage you need to pay a 3.5% down payment and have a credit score of 580 or higher. Similarly, if your property is in an eligible rural area and you belong to the low-income category you can use the USDA loan. Veterans on the other end qualify for low-income mortgages using VA loans.
Can the government help me buy a house?
Yes, the government will help me to buy a house but in different ways. If you want to get help from the government for buying a house directly, then you can apply for down payment assistance for a house. This is the grant that you will get for free or in the form of a low-interest loan.
What If I Do Not Get Approved For A House With Low Income?
Rejection of your mortgage application by a lender is not an end to your home-buying journey. It means you need to explore your options and work harder to get on track. For instance, reduce your debt or improve your credit score, ask your friend or relative for a cash gift to cover the down payment or find a cosigner.
