Intro to Mortgages / Mortgage Process

Types of Low-Income Home Loans for all Budgets

You don’t have to make a six-figure-a-year income to become a homeowner. There are many ways for people with all budget sizes to secure a home loan without having to get a second job or feel obligated to pinch pennies every month. If you are looking into a low-income home loan, you should consider programs such as Fannie Mae, Freddy Mac, or FHA loans. Each option allows those with lower annual incomes to obtain a mortgage they can afford. If you need a low-income mortgage, take a look at the options in this article and decide which will work best for you.

What is a Low-Income Home Loan?

A low-income home loan is a mortgage based on various circumstances some face with a low annual income. These issues include things like poor credit, no down payments, and current debt. Most of these loans are income-based and are never offered to those with higher income, thus, making it a little easier for lower-income borrowers to obtain a mortgage.

What do these Types of Loans Do?

If you qualify for a low-income home loan, you get the benefits not offered by most banks and mortgage lenders. Benefits of low-income mortgages include but are not limited to,

  • Relaxed credit requirements
  • Affordable interest rates
  • Low to no down payments
  • Lower closing costs
  • Lower mortgage insurance rates

With more flexibility with requirements, many people who wouldn’t be able to secure a loan with a standard mortgage can now apply for and close on a home.  

Types of Low-Income Home Loans

If you believe you might qualify for a low-income home loan, here is a list of the most common companies available.

Freddie Mac

Freddie Mac offers borrowers with limited funds to put towards a down payment the ability to obtain a mortgage. With the national downpayment average on a home hovering around 12%, the low 3% required by Freddie Mac can be a huge benefit to many families. Although this is a great option for those with no significant savings, you are still required to have a 660 credit score. To meet the income guidelines, you cannot make more than 80% of the area’s median income (AMI).

Fannie Mae

Fannie Mae is a home mortgage lender that loosens the restrictions which would otherwise keep a borrower from obtaining a home loan. With a Fannie Mae loan, there is a lower down payment required at just 3%, and borrowers can use grants or gifts to cover their down payment if needed. This company is ideal for those who bring in under 80% of the median income for their area and have credit scores of 620 or higher.

FHA loans

FHA loans help those with poor credit obtain a home loan with looser requirements but a slightly higher down payment than the first two options above, at 3.5% for a 580+ credit score or 10% for a 500-579 credit score. While the credit requirements are definitely more flexible with FHA loans, the upfront costs will be a lot higher. Along with the down payment, borrowers must also pay for their annual mortgage insurance upfront. Each county is a little different in requirements and terms. Be sure to check with a mortgage lender in your area for specific details.

USDA Loans

USDA loans are funded by the United States Department of Agriculture, offering zero down payment mortgages to buyers in rural housing developments.  This type of loan is given to moderate to low-income families with a credit score of 640 or higher. To obtain a USDA loan, you must meet the location requirements.

  • Town, city, or village of no more than 10,000 residents
  • Open country not associated with or a part of urban areas
  • A place that is not in a highly populated metro area ( more than 10,000 but less than 20,000 people.)

Good Neighbor Next Door program (HUD Homes)

HUD homes are houses that are repossessed by the government and re-sold at a discounted rate. The Good Neighbor Next Door program offers these houses at a 50% discount to certain public workers, such as

  • Full-time pre-k-12th grade teachers.
  • Law enforcement officers
  • Emergency medical technicians
  • Firefighters

To secure this type of loan, borrowers must be willing to live in the residence for at least three years and select a home in a HUD-designated area.

Other Ways to Buy a Home with a Low-Income

Aside from finding mortgage lenders that have easier access to loans with fewer restrictions, you can obtain a loan through other means as well.

Talk to Family and Friends (Co-Signer)

Most financial institutions that offer home loans will allow borrowers to use another person’s income in addition to their own on their application. A co-signer is very useful when you have a low income but does hold the person responsible for payments if you fail to keep up with the mortgage agreement.

Obtain Another Source of Income (Savings)

Get a part-time job or side hustle to save up for the down payment and closing costs. The more money you can put down on your home, the smaller your monthly payments will be.

Pay Off Old Debt (Lower DTI Ratio)

You might struggle with obtaining a mortgage loan if you are currently paying on outstanding debt, even if it is in good standing. Paying down outstanding debts will lower your current debt and increase your available income. (DTI debt to income)

Seek Out Help (Grants)

Your local government housing agency might offer home-buying assistance programs that provide things like loans and grants to home buyers that can help cover your closing costs or downpayments.

Contact a Pro (Real Estate Agent)

Real estate agents are high-trained and knowledgeable in the housing market. These professionals can help you find a house in the right area for the best price and locate programs ideal for your current income. When hiring a real estate agent, do your research before settling. Make sure you find someone who is reliable and reputable to ensure you are getting the best advice out there.

LoanCredit requirementsDownpaymentIncome eligibility
Freddie Mac6603%80% AMI
Fannie Mae6203%80% AMI
FHAUnder 6203.5%Per county
Good NeighborNA$100 or lessNA

 

FAQs

What is the Easiest Mortgage for Low-Income Buyers to Obtain?

The most accessible mortgage low-income buyers can qualify for is the FDA loan. This is due to the lower credit requirements and flexibility on down payments and closing costs.

Should Low-Income Buyers do Rent-to-Own?

Rent-to-own can be beneficial to those with low incomes. Before choosing this option, consult with a loan officer to ensure you are getting reasonable rent and that the plan ensures the home is mortgage-ready in the agreed amount of time.

How Much Money Down is Required for Low-Income Loans?

Most low-income loans ask for around 3% down. This means you need at least 6,000 down on a home that costs $200,000. Don’t forget, if you are required to pay closing costs upfront, the average amount for that is an additional $3,860 plus tax.

The New SONYMA FHA Plus Program

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