For most of us, buying a home is the biggest financial commitment we will make in our lives. Saving up money for a downpayment, taking out a loan that will take thirty years to pay off, and preparing for a monthly payment that will likely be bigger than all the rest of our bills combined is quite a challenge.
For those who have low or moderate income, the challenge becomes even greater. The traditional down payment needed to buy a home is 20 percent on a conventional fixed rate mortgage. So if you are looking at buying a $100,000 house, that means you would need to save up $20,000. For most families, that’s a serious chunk of change. This makes some people think they can’t afford to buy a home at all, and should continue to rent.
Fortunately, there are a plethora of loans and other assistance programs for low income home buyers. Here, I will outline some great options available so you don't necessarily need to give up on the dream of home ownership just because money is a little tight.
Low Income Loans
When buying a house, the most significant financial commitment is the home loan you will need to get from a mortgage lender to complete the purchase. This is especially important for low-income families, as they will need to make sure they can afford the monthly payments that will be due for years to come. The second biggest commitment is the down payment for the home, which can be hard to find the money for without a robust savings account.
The good news is that there are a number of loans that can help make your monthly payments affordable. Many of these loans also offer a lower minimum down payment requirement compared to a conventional loan, so you don't need a ton of savings to get a new home. In fact, in some cases, you don’t need any savings at all. Here are a few loans that are designed to help low-income homebuyers.
Back by the Federal Housing Administration, FHA loans are an excellent option for buyers with low credit scores. They are also a good choice if you have a high amount of debt or a low monthly income, as they are easier to qualify for than a traditional home loan.
Your debt to income ratio is a key indicator for getting a home loan approved. With an FHA loan, that ratio can be as high as 45 percent, far higher than most mortgage loan requirements. Your credit score can also be as low as 500 if you can come up with 10 percent of the home’s purchase price for your down payment.
With all these benefits, an FHA loan is one of the most widely-used loans that offers low down payment minimums. If you are a low-income homebuyer, be sure to ask your lender if you are eligible for this type of loan.
First of all, don’t confuse these with FHA loans. Coordinated through your local Housing Finance Agency (HFA), these home loans are actually conventional loans backed by Fannie Mae and Freddie Mac but with a lower down payment than most conventional loans. Sometimes your down payment can even be as low as three percent.
The minimum credit score for the HFA home loan program is 620, which is considerably higher than FHA loans, but there are added benefits. You may be eligible for discounted mortgage premiums and lower interest rates, for example. If your credit score isn't too bad, but your income is low, contact your local housing finance agency to check eligibility requirements and see if you qualify.
Backed by the Veterans Affairs Administration, these loans are very appealing to low-income homebuyers because they have no minimum credit score requirement, and you can get them with no down payment.
Another benefit is that you will not need to pay mortgage insurance since VA home loans are government-backed programs. They also allow you to ask the seller for up to four percent of the purchase price of the home towards your closing costs.
This can be a massive benefit if you are active-duty military, as having a low income is often a by-product of serving. It’s a pretty exclusive home loan, though, as only current military service members, veterans, and their families are eligible.
In specific rural areas of the country, you may qualify for a U.S. Department of Agriculture (USDA) home loan. This is another example of government programs that offer loans with no money down and low interest rates but have some restrictions.
The area you are looking to buy a home must be approved by the USDA. In addition, your household income must meet established guidelines, and you need to have a credit score of at least 640.
The USDA offers two types of loans. One is called the “guaranteed program” and applies to buyers with a household income of 115 percent or less than the area mean income (AMI). The other one is called the “direct program” and applies to buyers with a household income between 50 and 80 percent of the AMI.
Other Resources For Low-Income Home Buying
In addition to flexible loan programs, there are a number of other strategies and government-backed programs that might help you. It’s important to remember that selecting the right loan is only the beginning, as there are several other ways you can continue to save money during the homebuying process.
Homeowner Voucher Program
The Housing Choice Voucher (HCV) program allows eligible families to receive financial assistance from the U.S. Department of Housing and Urban Development (HUD) each month to help meet the expense of homeownership.
There are income and employment requirements to enroll in this program, but the employment requirements will be waived if you are disabled or elderly. You also will need to complete a counseling course covering homeownership.
It’s also important to note that this program is not offered by every Public Housing Agency (PHA). They can determine whether or not to implement the HCV homeownership program in the areas they oversee.
Down Payment Assistance Programs (DPAs)
As you may have guessed from the name, these programs can help you pay for your down payment on a home. DPAs can be from an official government organization, a non-profit organization, or a for-profit business geared toward helping low-income homebuyers.
Restrictions vary by organization and DPA program, but there is often a minimum income requirement to receive assistance. In some cases, though, buying in a particular area will make you eligible regardless of your income level. The average amount of money people receive from a DPA is about $12,000. This is a significant amount of money toward buying a home, and unfortunately, most people who would qualify never apply because they don't know DPAs exist.
When homeowners can’t pay their FHA loan anymore, they are considered “in default.” When this happens, the house becomes the property of HUD. Next, the home is listed for sale and is referred to as a “HUD home” or “real estate owned (REO) property.”
A list of these properties can be found at the Hud Home Store, where you can search by location to see if any HUD homes are available in the area where you want to live.
Not everyone qualifies to buy a HUD home, as there are requirements regarding money for a down payment, ability to get a mortgage, and credit score. One nice feature of HUD homes is that you can use an FHA loan to buy one.
Good Neighbor Next Door
If you’re looking to buy a hud home and would like a 50 percent discount (and who wouldn't!), you might be able to take advantage of the good neighbor next door program. This is geared toward nurses, first responders, and teachers, so it’s a bit exclusive. However, if you work in one of these professions, the benefits of this program are very appealing.
To use the program, you will need to submit an offer through a licensed real estate agent. If your offer is accepted and you can secure financing, you will receive the 50 percent discount in the form of a second mortgage. This isn't a mortgage you make payments on, though, as it is terminated once you simply live in the house for three years.
Mortgage Credit Certificates (MCCs)
Mortgage interest is a cost of home buying that deters many low-income families from purchasing a house. MCCs alleviate some of that cost by giving you a tax credit equal to a certain amount of your mortgage interest.
Amounts vary greatly depending on where you live, but this assistance can allow you to search for homes at a higher price point because lenders will include the credit in your income when you apply for a loan.
Mobile And Manufactured Homes
When it comes to saving money on your home purchase, considering mobile and manufactured homes is a great idea. In terms of the purchase price, these homes are far less expensive than traditional houses.
They also can be purchased with a variety of loans, though some lenders require an increased downpayment to finance a manufactured home. In some cases, these types of homes are not classified as real estate, which means they can be purchased with personal loans.
Under this arrangement, the buyer and seller agree on a price for the home, and the buyer can purchase the house for that price in the future. The buyer then functions as a renter, paying the owner of the home each month for an agreed-upon period of time until it is time to complete the purchase.
When it is time to go from renter to buyer, a mortgage is usually used to complete the sale. This can be any type of mortgage, as the transaction now becomes essentially the same as a traditional home sale.
Rent-to-own arrangements can be beneficial to buyers who don't currently have the income, credit score, or debt-to-income ratio to purchase a home but want to move in right away. The devil is in the details, though, as sometimes sellers can exploit novice buyers by creating terms that will not favor the buyers in the long run. This can include asking for an excessive sales price based on inflated predicted home value increases. Be sure to have a licensed real estate agent or lawyer review any contracts before signing.
Understanding all of the various loans and other assistance programs you qualify for is the key to success when trying to buy a home with a low income. You won’t get any assistance you don’t ask for, so be sure to do all the research you can and ask your real estate agent and lender to offer advice as well. Once you know everything available to you, finding your dream home may be more achievable than you think.