Buying a Home With Lower Income
Do you have a low income but would love to purchase your first home? Finding a house for low income can be challenging, especially when it is not a buyer’s market.
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 home buying. 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 home buyer 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. It is a mortgage loan that is not only popular with first-time home buyers but moderate-income borrowers too. The FHA loan program is one of the most popular for buying a house with low income.
An FHA loan reduces the requirements you will normally have to face to qualify with a lender. They are more lax than conventional loans when it comes to debt-to-income ratio and the minimum credit score to purchase a home.
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 a DTI ratio 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 private 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.
A family member is an other excellent option for getting financial assistance.
VA Loans
VA mortgages are sponsored by the Department of Veteran Affairs. The eligibility requirements are straightforward.
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.
USDA Loans
USDA loans are sponsored by the United States Department of Agriculture.
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.
For buyers in rural areas it is one of the loan options worth looking into.
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 mortgage option.
In order to qualify for a USDA loan, the property will need to be located in what’s considered an eligible rural area. Generally, the population must be under thirty-five thousand for an area to qualify. It can be a good option in some suburban areas with lower populations as well.
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
Finding a house for low income can often be solved by purchasing a mobile home if you’re willing.
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.
Un-mortgageable Homes
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.
HUD Homes Are An Option As a House For Low Income
When a mortgage lender holding a FHA loan is foreclosed on, the United States Housing and Urban Development (HUD) will auction the property.
Quite often these properties are sold for less than market value making it an affordable home option for folks with lower incomes. Keep in mind, however, that HUD Homes are foreclosures which are sold in as-is condition. There will be no repairs made which can be risky, especially when they are clearly needed.
If you would like to research this kind of home for low income, you can visit the HUD Home Search Site.
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.
Home Ownership Vouchers Program
One of the most well known homeownership programs to get a house for low income is referred to as Section 8 housing. The housing choice voucher program has rental assistance for low-income families who can use the vouchers to become homeowners.
The vouchers programs are run by local housing agencies. If you would like to use the housing voucher to purchase a home, you’ll need to consult with the local public housing authority.
There are a few requirements including meeting the household income requirements. If you are disabled or elderly you must meet the employment requirements. Lastly, it’s for first-time buyers who must complete a homeownership counseling program and any other guidelines in place by the local housing agency.
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 For a Low Income House
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.
Tips on Making a Home Purchase With Lower Income
Finding a house for low income doesn’t have to be out of reach. With some patience and hard work you can achieve your goal of homeownership. Let’s go over how to make it happen sooner.
Working on Improving Your Credit Score
With improved credit scores, you will get better loan terms which in turn will lower your monthly payment on a mortgage. With better scores, mortgage lenders will offer lower interest rates. The easiest way to improve scores quickly is to make your payments of any debt on time.
Strive to pay down existing debt whenever possible and don’t use your credit cards to make unnecessary purchases. You’ll want to keep your credit utilization to a minimum when building credit.
Try using Credit Karma which is an excellent credit improvement service that is free. They will give you timely credit advice that will help boost your finances. You can also check your credit reports which is always a good idea.
Get a Co-signer For Your Low Income Mortgage
When you are making a home purchase with either low income or bad credit, having a co-signer is not a bad idea. Doing so could be what puts you over the hump. By utilizing someone else’s credit history it could help you get into a house quicker ans start building equity.
While there are bad credit home loans available, they come with much worse mortgage terms. If you can find a co-signer it will usually be a better option.
Keep a Budget and Stick to it
When you have a lower income budgeting becomes critical. Knowing what you can afford to spend each month as monthly payments for all your bills is crucial. Do your best not to exceed the maximum you can comfortably afford.
When looking for low income housing it is crucial to stay within your means to avoid financial problems.Click To TweetHousing For Low Income
What are the best choices for housing when you have low income? There are a few options that could work as lower cost homes. Four kinds of homes are the following:
Each of these housing options for low income tend to be lower priced than traditional homes. Take a look at the resources provided for each to learn more about them.
How to Find Housing For Low Income
The best way to find housing for lower incomes is to find a local real estate agent you can trust. There are agents who love finding affordable housing options. Getting someone into a home for the first time can be a great feeling.
Real Estate agents can search the multiple listing service to see if any of the above low income housing choices are available.
You can also try doing a Google search for low income housing near me. You might find a few unexpected options including possibly a for sale by owner.
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 billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 35+ years.
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I’m a real estate investor and like to read different blogs on real estate. Your blog is really helping low-income people to buy their own house.
Thanks Lucas – I appreciate the comps. Buying a home with low income can be more challenging but certainly not impossible.
It’s good to know that there are down payment assistance programs one can get when attempting to buy a house. A friend of mine has been steadily getting back up after a bankruptcy a few years ago. Maybe a low income housing option would be a good way for him to be able to finally move out from an apartment he has been sharing with his sister.