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Updated on Wednesday, January 30, 2019
Transitioning from renting to owning a place of your own can seem like the impossible dream rather than the American dream, especially when home prices today are among the highest ever recorded.
Thankfully, there are options for those who want to buy but don’t have the income to qualify for a conventional loan.
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Home loans for low-income borrowers
Government-backed loans can provide a path to homeownership for buyers who thought their low income would keep them in a rental forever. “Government-backed loans generally have more-accommodating income requirements,” said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. “A lot of people don’t realize how many different types of programs are available.”
Federal Housing Authority (FHA) loans are among the most lenient in terms of income, credit and down payment requirements. In fact, FHA loans do not have a minimum income requirement — however, there are income-related conditions borrowers must meet.
Income requirements — Lenders will typically verify two years’ employment and analyze borrowers’ income expectations for the next three years. Part-time work and gaps for seasonal work, military deployment and education may be considered, with documentation. Other sources of income, including overtime and bonuses, may be used to help buyers qualify.
Down payment — The minimum down payment is 3.5%, which can come from a gift from relatives, an employer, an approved charitable group or a government homebuyer program.
Minimum credit score — Borrowers can have a credit score as low as 500 with 10% down; with 3.5% down, the minimum score is 580. Applicants without a credit history may qualify by meeting stricter underwriting guidelines.
Debt to income (DTI) — The maximum DTI ratio, which is calculated by dividing your debt by your income, is generally 31% of the borrower’s monthly housing commitment and 43% of all monthly debts.
FHA loans are available on one- to four-unit properties, mobile homes and factory-built housing.
FHA loans require an upfront mortgage insurance premium (MIP) equal to 1.75% of the loan amount and ongoing mortgage insurance with less than 20% down. Unlike some other government-backed loans, mortgage insurance is not cancellable; borrowers will have to refinance to get rid of it.
HomeReady® is a loan from Fannie Mae that offers financing for low-income buyers. With one of the lowest down payments available and flexible income requirements, it may be good choice for those who don’t need an FHA loan for credit score reasons.
Income requirements — There is no limit on properties located in low-income areas, which you can find on the U.S. Housing and Urban Development (HUD) site.
For all other homes, borrowers must be at 100% of the area’s median income.
Payments from a rental property can be counted as income, and non-occupying co-borrowers (such as parents) can also boost a borrower’s qualification potential.
Down payment — This loan requires a minimum of 3% down. Funds can come from outside sources, including gifts and grants.
Minimum credit score — Borrowers can have a credit score as low as 620; however, rates are typically better for a score of 680 and up.
DTI — HomeReady’s maximum DTI is 45%; the DTI can go higher if additional household income is used.
- Financing can go up to 97% of loan-to-value (LTV) on a single-family home.
- This loan can also be used for one- to four-unit primary residences and manufactured housing.
- Borrowers can cancel their mortgage insurance once their home equity reaches 20%.
- Minimum credit scores are higher than for FHA loans.
- This loan requires at least one of the borrowers to complete an online housing education program.
The Freddie Mac HomePossible® mortgage offers down payments as low as 3% for very low- to moderate-income homebuyers. The unique aspect of this loan is that it offers borrowers the option of applying sweat equity to their down payment and closing costs, which could result in a $0 move-in.
Income requirements — There are no income requirements for properties in low-income census tracts; in other areas, borrowers’ income is capped at 100% of the Area Median Income (AMI). Applicants also can use the income from a non-occupying co-borrower and rental income to qualify.
Down payment — The minimum down payment is 3%, which can come from family, employer-assistance programs, secondary financing and sweat equity.
Minimum credit score — There is no minimum credit score, as long as other eligibility requirements, such as verifiable housing payments, are met.
DTI/LTV — DTI can be as high as 50%. Maximum LTV is 97% for a one-unit primary residence and 95% on two- to four-unit primary residences and manufactured homes.
- There is no upfront mortgage insurance fee, and private mortgage insurance (PMI) can be canceled once the LTV is below 80%. Insurance coverage costs are also reduced for LTVs above 90%.
- A variety of loan options are available, including 15- and 30-year fixed-rate mortgages and adjustable-rate loans.
- Qualification requirements and loan limits may be stricter than for FHA loans.
- Borrowers are required to take housing counseling courses to boost financial literacy.
USDA Single-Family Housing Direct Home Loans
This program from the U.S. Department of Agriculture (USDA) can help those with very low income purchase a home with a minimal down payment and subsidies that further reduce monthly payments. Payment assistance can drop interest rates to as low as 1%. The residence being purchased must meet eligibility requirements as being in a rural area.
“There is a simple tool on the USDA website where you can figure out if an area you’re considering is eligible,” said Kapfidze. “There are a lot of small towns and even some suburban areas that meet the standard. It’s a broader program than people realize.”
With the USDA direct loan, the USDA is the lender and loans are for up to 33 years, or 38 years for very low-income borrowers.
Income requirements — The USDA adheres to strict income requirements for single-family direct home loans, with eligibility based on the area’s adjusted income limits. The income limit must be met by all members of the household, and borrowers must “demonstrate a willingness and ability to repay debt,” per HUD.
Down payment — There is no down payment required unless the borrower has more than $15,000 (or $20,000 for elderly) in non-retirement assets; in this case, the borrower may be required to direct funds toward the home purchase.
Minimum credit score — A minimum 640 credit score is required; however, borrowers with federal judgments will not be able to secure financing with any score. Alternative credit such as rent and utility bills may be used for applicants with limited or nonexistent credit scores.
DTI — The principal, interest, property taxes and insurance (PITI) are capped at 29% of very low-income borrowers’ income, and 33% for low-income borrowers. DTI is limited to 41%, regardless of income.
- There is no PMI on these loans.
- Down payment funds can come from multiple sources including gifts, grants, tax credits and seller concessions.
- Borrowers are required to pay a $25 credit report fee, but all other fees can be rolled into the loan.
- While the USDA’s payment assistance can make the mortgage payment more affordable, borrowers are required to repay the subsidy once they transfer title or no longer occupy the property.
- Borrowers must “be without decent, safe and sanitary housing” and “be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to meet,” per HUD.
- The property must be located in a rural area, must generally be under 2,000 square feet and with a market value below the area loan limit and must not be an income-producing structure.
- Attending a Homebuyers Education and Counseling class is also required for first-time homebuyers.
USDA Single-Family Housing Guaranteed Loan program
The USDA’s Single-Family Housing Guaranteed Loan program is similar in many ways to the Single-Family Housing Direct Home Loans program. There is no down payment requirement, minimum credit score and DTI are the same, as well as the option to get down payment funds from multiple sources. There are a few key differences, however:
- Moderate income is allowed. You can find limits here.
- There are no subsidies.
- Loan terms can be 15 or 30 years.
- There is no maximum loan amount or square-footage limit.
- The guaranteed loan is funded by private lenders and backed by the USDA.
With income limits and no subsidies, borrowers may find it more difficult to qualify for this loan. In addition, there is a one-time mortgage insurance fee (1% currently) and an annual fee of 0.35%.
U.S. Department of Veterans Affairs (VA) guaranteed loans
VA guaranteed loans are intended to make homeownership affordable for military service members, veterans and surviving spouses who meet eligibility requirements. These loans offer some of the most favorable terms industrywide, with no down payment and with interest rates that can be be lower than FHA and conventional rates, but borrowers will need a Certificate of Eligibility (COE) to confirm they meet the VA’s terms.
Income requirements — There is no specific income requirement other than to ensure that veteran borrowers can afford the loan.
Down payment — VA-guaranteed loans provide 100% financing.
Minimum credit score — There is no minimum credit score for a guaranteed loan. The VA requires approved lenders to consider an applicant’s entire loan profile, and individual lenders may apply their own credit score requirements.
DTI — There is no maximum debt-to-income ratio, however, borrowers with a total DTI ratio over 41% may have stricter terms.
- There is no mortgage insurance on VA loans.
- The VA has a one-time VA funding fee that varies depending on the type of service, the type of loan and the down payment. It can be rolled into the loan and those who are receiving disability compensation do not pay the fee.
- Loan holders have access to regional loan technicians who may be able to help veterans avoid foreclosure should they become delinquent.
The one-time fee can be more than borrowers are comfortable paying and is higher for Reservists and members of the National Guard.
More tips for buying a home when you have a low income
The first step in any homebuying process is to check your credit score so you know what to expect — and what to work on. Credit scores generally range from 300 to 850, and while you don’t need a high credit score (or any score at all) for every low-income loan, a better score may yield lower rates or improve approval odds.
Down payment assistance
There are a variety of national and local programs that can help low-income homebuyers with their down payment, including the American Dream Downpayment Initiative, which provides grants to first-time buyers with household incomes below 80% of the median in their area. You can also search HUD for state-by-state down payment assistance programs.
“Down payments are the biggest obstacle to homeownership for many,” said Kapfidze. “If someone solves that problem for you, you’re halfway there.”
Talk to a housing counselor
The Consumer Finance Protection Bureau (CFPB) has a list of HUD-approved counseling agencies across the country that can provide advice on different mortgages and help find the best option for your circumstances. Working with a housing counselor may be free of charge.
Figure out your budget
When you pre-qualify for your loan, your lender will let you know the maximum amount you can spend on a home. But what you are comfortable paying every month may be different. Creating a detailed budget that outlines all current expenses — and those you may be able to predict in the near future — can help you figure out just how much home you’re OK with purchasing.
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