Buying a Home With Lower Income
Do you have a low income but would love to purchase your first home? It can sometimes seem like an uphill struggle to buy a house if you have a low income. Lots of folks ask themselves, “can I afford a house”?
There is the down payment to save for starters when you may already have problems paying the bills or debts to pay off. However, the government has programs designed to make buying a house with low income more realistic.
These programs often offer much better deals over traditional conventional mortgages, and they are normally only available to people on low incomes.
There may be some extra things you need to do to qualify, like taking an educational course on homebuying. But if you are approved, you could benefit from better interest rates, lower down payment requirements, and reduced mortgage insurance payments.
There are many programs offered, one or more may suit your situation. Let’s take a look at the options for low-income home buyers.
If you are a low-income renter and your goal is becoming a homeowner, here are the programs you should look into.
Whether you can afford a house is something that should be taken seriously. Even if you can get a mortgage, you don’t want to be living on boxed spaghetti for the rest of your life.
Low Income Mortgage Loans
Some of the best mortgage programs are specifically designed for buyers who have low to moderate-income. One of the first things asked when coming from a rental or a first-time buyer is, “how can I buy a home with low income but good credit.”
The low-income home loans discussed below provide the following advantages:
- Very competitive interest rates and mortgage payments
- Discounts on mortgage insurance premiums
- Low down payment requirements
- Down payment assistance, whether by grants or loans.
As previously mentioned, many of these loan programs typically require borrowers to complete some form of approved homebuyer education, especially when you’re a first-time buyer. It should also be noted that all of these mortgages require owner occupancy. No rentals of vacation properties are allowed.
Buying a house with low-income is challenging but not impossible when using one of these mortgage programs. Affording a home can become easier when you have prepared yourself both financially and emotionally.
FHA Loans Are Excellent For Low-Income Buyers
The Federal Housing Administration has a program to help people buying a house with low income. An FHA loan reduces the requirements you will normally have to face to qualify with a lender.
If your credit score is as low as 500, you may be able to find a participating lender willing to give you a mortgage. However, you can expect to have to produce at least 10% for a down payment.
It will be easier to get a loan through this program if your credit score is above 580, however. The lender may also accept debt to income ratios of as much as 45%.
The other desirable feature with an FHA mortgage is your ability only to put 3.5% down. Naturally, those who have lower incomes have a harder time coming up with a larger down payment. The FHA puts a considerable amount of people into a home who otherwise would not be able to qualify.
When you are asking yourself can I afford a house, the FHA program may help you get there.
HomeReady and Home Possible Advantage Loans
HomeReady from Fannie Mae, and Home Possible Advantage from Freddie Mac, offer home buyers a low down payment option. When you qualify to buy a house with a smaller income through either of these programs, you will only need to find 3% for the down payment.
You are also allowed to get the down payment money from gifts, loans, or grants.
Sometimes, programs like this can attract high mortgage insurance, but not in this case. Having only a 3% down payment, you would expect to have to pay around 0.95% in mortgage insurance per year with a credit score of over 720. The Fannie and Freddie programs discount this to as low as 0.65%.
Another advantage of these programs is that the seller can pay some or all of the closing costs. This is allowed up to 3% of the loan value.
If you are a current or former member of the military, you can get help to buy from the VA. They don’t worry about your credit score, will finance 100% of the purchase price, and don’t require any money down.
On top of this, they don’t even need you to pay mortgage insurance. There is a funding fee, however, but this can be added to the loan amount.
When you have served our country, getting a VA mortgage is a no brainer, especially when you don’t have a high income. Take a look at our guide on VA loans to see everything you need to know when choosing this type of loan product. The advantages of a VA loan are numerous.
If you qualify for a VA mortgage, the loan being no money down makes it easier to afford a house.
If you live in a rural area, the USDA may be for you. It offers homebuyers up to 100% financing without any requirement to find a down payment. They operate two programs – Guaranteed and Direct – based on your income relative to the median income in the area you are buying in.
USDA mortgages and VA loans are both perfect options when you have low income and little money saved. As long as you meet the income requirements, it could be the perfect loan option.
In order to qualify for a USDA loan, the property will need to be located in what’s considered a rural area. Generally, the population must be under thirty-five thousand for an area to qualify.
Good Neighbor Next Door
The HUD Neighbor Next Door program offers low-cost foreclosed homes to teachers, police officers, firefighters, and emergency medical workers. You can bid on properties on the HUD website, and if you win, you could benefit from a 50% discount.
The discount is actually a second mortgage that you don’t have to pay off and is canceled after you have lived in the home for three years. While this may all be very appealing, there aren’t many properties on offer, so even if you are working in one of the eligible professions, you may not find an appropriate property.
Mobile Home Loans
Buying a manufactured or mobile home offers advantages to people on low incomes. Homes of this type are more affordable and can be purchased using standard mortgage programs. However, a mortgage for a mobile home may be subject to different terms compared to regular housing.
You can get a loan from Fannie Mae’s HomeReady program, though you will have to find 5% for a down payment instead of the 3% for a regular home.
You have more options to finance the purchase of a mobile home as well. Since they aren’t classified as normal real estate, personal loans can be used to purchase. The FHA has their Title 2 program for this purpose, and this is a personal loan rather than a mortgage.
Another solution to the difficulty of getting a mortgage is buying a home that cannot be financed through traditional means if you have a lower income. If people cannot get a mortgage on a property because of something about the home, this will significantly reduce the amount it can be sold for. For example, the septic system failed.
If you find a suitable property of this type, it could be financed through a personal loan. You will have less to pay back to the lender, and you won’t have to worry about an appraisal. This type of loan typically gets approved faster than a mortgage would as well.
Mortgage Credit Certificates
Some local governments issue mortgage credit certificates. These allow you to benefit from a tax credit that can be used to increase the size of the mortgage you can get approved.
Lenders consider this as income when they look at your financial situation, allowing you to purchase a more expensive property than your income may otherwise permit.
What About Renting to Own?
Another option for those who have low incomes and eventually want to have their own place is rent to own. Renting to own might be the best option if you can find such a property when you just don’t have enough income to procure a mortgage.
With rent to own properties, you typically will pay a higher monthly rent, of which some portion of that will go towards your down payment of the future purchase of the property.
The benefit of renting to own is that it could eventually get you into the house you would like to purchase at a future point when you’re able to qualify for the mortgage payments.
There are, however, some significant downsides to renting to own, which are discussed at length in the reference above. It will also be an obstacle to finding an owner who is willing to do a rent to own situation.
You might not be able to get a mortgage or afford a house right now, but renting to own could eventually help you get where you want to be.
Down Payment Assistance
There are many down payment assistance programs operated by the government, charities, and other groups that you could be eligible for. They are often directed towards people buying homes in certain areas, and there are normally limits on your earnings for you to qualify.
Average grants or loans through these programs stand at around $12,000—most people who could benefit from these programs never actually apply to them, however.
Make sure you don’t miss out on this type of grant by checking what is available to you. Your real estate agent should be able to help.
It would be wise to see if your state has a sponsored down assistance program by doing a Google search. In different states, you can occasionally find a mortgage program that offers down payment assistance.
Other First Time Home Buyer Programs
While there have been quite a few low-income mortgage programs discussed here, there are other first time home buyer financing options as well. Take a look at the complete summary of some of the best financing options for first-time homeowners. Depending on your circumstances, one of these might suit your needs better.
What You Will Need to Provide The Lender
You are probably thinking about what you will need to provide the lender in order to get the mortgage. Take a look at what documentation a lender will need to approve a loan for all of the major types of loan products.
By understanding what you need to give the lender, you’ll put yourself in a better position to make the loan process go smoothly. Lenders love it when buyers are fully prepared upfront.
Final Thoughts on Low Income Home Loans
When you have a low income, buying a house is certainly not easy but doesn’t automatically rule it out. There are many options if you have a low income. Government programs and loans from other organizations are available to make things easier for you.
If you know what help or programs you can qualify for, you could buy a home without any money down. If you do find that low-income loan you’ve been looking for, make sure to avoid one of the many common mortgage mistakes that could lead to problems.
Whether you can afford a house is only something you’re able to decide.
Hopefully, you have found this information on buying a home with a low income to be helpful.
About the author: The above Real Estate information on how to buy a house with low income was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ years.
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