If you have a stable job but earn less than you want, you may wonder if you can afford a home. You need to earn enough to qualify for a mortgage, but your income is one part of what mortgage lenders will consider. There are also several mortgage programs aimed at low-income borrowers.
Can I buy a low-income house?
Yes, you can buy a low-income home as long as you can reasonably afford the mortgage, maintenance and other expenses associated with owning a home.
When you apply for a mortgage, your bank or lender will assess your debt to income (DTI) ratio. This is an important measure of how your income accumulates against your mortgage and other debt payments. A low income could lead to a higher DTI ratio, but that doesn’t necessarily mean you’re not entitled.
However, keep in mind: low income cannot rule you out of homeownership, but it can prevent you from purchasing the right home for your needs in terms of size, location, or cost.
How to Buy a Low-Income Home
Buying a home involves several steps from budgeting, especially budgeting for low incomes, pre-approved, creating offers and closing. Here’s an overview and tips:
1. Understand your current financial situation. Knowing facts about your finances will help you plan to buy a home. Understand how much you have already saved due to your current DTI, credit score, and down payment and closing costs, as well as how much you can reasonably spend on monthly mortgage payments. How many homes can we afford? A calculator is useful.
2. Work on your credit score. Credit scores are one of the biggest factors in determining your mortgage rate, so the higher your score, the lower your monthly mortgage payments. It takes time to improve your score, so check your report and score as soon as possible and plan. Do your best to pay your bills on time and avoid opening new credit lines. Additionally, look for errors in the report (such as incorrect contact information). If you find inaccuracy, contact your credit department and resolve things.
3. Connect with your lender early. Even if you’re not ready to buy a house yet, get in touch with a few lenders and learn exactly what you need to qualify. Loans help you understand lenders’ credit scores, DTI ratios, other requirements, and fees. The lender can also prequalify you, so you can know how much you can afford.
4. Shop the lender and approve it in advance. Compare mortgage offers and fees from at least three mortgage lenders. When you’re ready to start shopping at home, get pre-equipped for a loan. Pre-approval is required to create an offer.
5. Find a home and apply for a mortgage. Once the seller accepts your offer, submit a purchase agreement with the lender. You then move the loan through the underwriting process, which includes assessment and verification of employment and income. This may take time. Some of these may require the lender to submit an additional or copy of the document.
6. Close. Once the loan is cleared to close, you will pay the closing fee and prepare to move to your new home.
Low-income mortgage programs
There are several mortgage programs tailored to low- and middle-income borrowers. Some of these offer more room for income, but still impose certain requirements.
Home Leedy Home Loan
Fannie Mae’s Home Leady Mortgage Program addresses one of the challenges of buying a low-income home by requiring just 3% of the home’s price as a down payment. With this loan, the down payment and closing costs funds come from other sources beyond savings, including grants and gifts, and you don’t have to personally donate money.
To qualify, your income cannot exceed 80% of the median income (AMI) of the area where you are buying the home. (You can use Fannie Mae’s tools to look up local restrictions.)
You can place just 3% on a HomeReede mortgage, but you will need to pay private mortgage insurance (PMI) until you acquire 20% stake. With your monthly mortgage payment, you will be paying your mortgage insurance, which will add to your expenses.
Additionally, you can add co-borrowers to your HomeReede mortgage, even if the person doesn’t plan to live in the home.
“Unlike other home-based loans, not all borrowers need to reside in their property,” says Serrano, a New York-based real estate lawyer and his fellow law firm, such as parents who don’t live in their homes, who can co-rob the loan with a loan to help qualify for a mortgage.
With a HomeReede mortgage, mortgage lenders can review your rent payment history and qualify for the loan, says D’Annucci.
Home Possibilities and Home-On Home Loans
Like HomeReedy’s mortgage, Freddie Mac’s home potential and home-on mortgage will be reduced by just 3%. Down payment funds can come from many sources, including family, employer assistance programs, and even sweat equity (i.e., if you have the skills to provide labor or materials to renovate your home).
Unlike HomeReady or Home possibilities, HomeOne mortgages do not have the income or geographical requirements to qualify, but if you beat less than 20%, you will need to pay for your mortgage insurance.
“There are a few other strings attached. If you’re a first-time buyer, you’ll need to go through a homeowner education program,” says Tabitha Mazzara, operations director at MBANC, a mortgage lender.
The first-time buyer class requirements also apply to the HomeReady program.
I had a loan
If your credit score is 580 or higher, you can reduce your FHA loans insured by the Federal Housing Administration by 3.5%.
“The loan has fewer strict requirements to support low-income borrowers and people with poor credit history,” said Gerwin Wallace, mortgage originator for Silverton Mortgage in Aniston, Alabama. “This loan also allows you to pay lower closing costs.”
However, if your down payment is less than 10%, your FHA loan comes with lifetime mortgage insurance (i.e. you cannot cancel it). The home you want to buy must also pass the assessment to ensure it meets FHA safety guidelines.
appear
VA loans are available to eligible Active Duty Service members, veterans and surviving spouses. With this type of loan, you don’t have to spend money (in most cases) or pay for mortgage insurance. Closure costs are less likely to result in other loans and allow you to earn a lower interest rate than other funding options.
Plus, VA loans are lifelong profits. This means that if you are eligible, you can get a VA loan multiple times.
However, you will need to pay a funding fee for this mortgage. That amount depends on whether you previously got a VA loan and, if so, how much down payment you paid. This is an additional cost to consider.
To qualify for a VA loan, “You need to have good credit, stable income and a certification from the VA,” says Mazzara. “And your loan amount should not exceed the value of your home.”
USDA loan
Like VA loans, USDA loans do not require a down payment, but the homes must be located in eligible rural areas. This means that you can only qualify if you are far from the city.
Also, your income cannot exceed 115% of your AMI. You will also be able to pay mortgage insurance with this loan in the form of prepayment guarantee fees and annual fees.
Good Neighbor Next Door Program
Good Neighbor Next Door is a home buying program that can be used by law enforcement officers, teachers, firefighters and emergency medical technicians. The program, managed by the U.S. Housing and Urban Development Agency (HUD), allows borrowers to purchase a 50% discount on the price in exchange for living in the property for at least three years.
However, the home is a real estate in the HUD determined “revitalization area” and must be sold through the program, and the listing can only be purchased for seven days. You will also need to get a second mortgage and a note to qualify for the discount, but as long as you meet the 3-year residency requirements, it will not be a second mortgage or its interest hook.
HFA Loan
To not be confused with FHA loans, HFA loans are another type of low-income mortgage via Fannie Mae (called “HFA Priority”) and Freddie Mac (known as “HFA Advantage”). HFA loans are available through state housing finance agencies (HFA). The lender partners with mortgage lenders to provide affordable loans to low-income borrowers. In many cases, you don’t need to be your first buyer to qualify. You may also get down payment support.
State and local down payment assistance programs
There are various local down payment assistance (DPA) programs, usually directed to low-to-moderate income borrowers. These programs are usually offered in the form of grants or loans, but the latter may need to be repaid or may qualify for forgiveness after a certain amount of time.
Mortgage credit certificate
A Mortgage Credit Certificate (MCC) is a federal tax credit that helps offset some of the money low-income and moderate income or first-time buyers owed on mortgage interest. Unlike tax credits, MCCS offers $2,000 dollar tax credits annually to eligible individuals. However, MCC is not free, so if you are qualified, consult a tax professional and learn if this is the right move for you. In many cases, savings over a 30-year mortgage are over the prepayment fee.
Manufacturing and Mobile Home Loans
If you are interested in manufactured homes or mobile homes, you are eligible for special funding for low-income buyers.
“MH Advantage, for example, is a Fannie Maroon program designed to fund manufactured homes,” Wallace says. “It has a lower down payment option, lower monthly payments, and lower interest rates compared to most standard loans in manufactured homes. It also combines HOMEREADY, HFA Priority Mortgages, and other mortgage programs without being tied to a specific program.”
