Top 5 Low Income Mortgage Options

Buying a home on a low income can be a daunting task. Although you may be able to afford the monthly mortgage payments, it is often difficult coming up with enough cash on hand to cover closing costs, the down payment and other expenses. Fortunately, there are mortgage options available for individuals in this situation.

1. FHA Home Loans 

The Federal Housing Administration insures more mortgages than any other organization in the world. The low interest rates and relatively relaxed requirements for securing this type of loan make it popular with first-time and low-income homebuyers. To be eligible for an FHA loan, you must have:

  • A credit score between 500-579 and a 10% down payment OR a credit score of at least 580 and a 3.5% down payment 

  • A debt-to-income ratio less than 43% 

  • Verified steady employment

  • At least two years since filing Chapter 7 bankruptcy

Additionally, the home you are purchasing must be your primary residence. You will have to pay a Mortgage Insurance Premium when you secure the loan and, in most cases, every year thereafter for the life of the loan. The home price must not exceed the maximum loan limits set by the FHA, which vary based on the location and type of home. The FHA updates these limits yearly.

Although FHA loans allow fairly low down payments, the funds must come from an FHA-approved source. Such sources include the borrower’s savings, cashed-in investments and gifts. You will need to document the source of gifted funds.

2. VA Home Loans 

The Department of Veterans Affairs helps active and veteran military members purchase homes. Eligible individuals apply for loans from a private lender. Because the VA guarantees a portion of the loan, lenders are able to offer homebuyers favorable terms, such as:

  • Low or no down payment 

  • Low interest rates 

  • No mortgage insurance requirement 

  • Flexible credit score minimum and debt-to-income ratios

  • Low closing costs 

Eligibility for a VA loan depends on a variety of factors, including:

  • Length of service 

  • Character of service 

  • Duty status 

For example, a veteran reservist needs to have served six years under honorable conditions, whereas an active-duty member in peacetime only needs to have served 181 days under honorable conditions. Eligible surviving spouses can also apply for a VA loan. Because VA loans are a lifelong benefit, an individual can secure multiple VA-backed mortgages during his or her lifetime.

For homebuyers, the first step in applying for a VA loan is securing a Certificate of Eligibility. This is simply a document that proves to the lender that you meet the requirements. After receiving this document, the loan officer will be able to determine the specific loan terms for which you are eligible.

3. USDA Home Loans 

The United States Department of Agriculture helps low-income homebuyers in rural areas secure a mortgage without a down payment via two programs, the Guaranteed Program and the Direct Program. With the Guaranteed Program, individuals making up to 115% of the local area median income work with USDA-approved lenders to secure a home loan. Individuals making between 50% and 80% of the median work with the USDA through the Direct Program.

In general, these loans require a minimum credit score of 640. Interest rates vary among lenders, so it is important to compare loan options.

The home must be in a rural area as designated by the USDA and must be used as the borrower’s primary residence. You can verify a location’s eligibility by viewing the USDA eligibility map. You can use this loan to purchase an existing structure or to fund new construction. There are no acreage limits. You can also use USDA loans for the following:

  • Site preparation for new builds 

  • Repairs for existing structures 

  • Necessary household equipment, including appliances and carpeting 

4. HFA Home Loans 

Housing Finance Authorities are run at the state level. This means that different states have different requirements for their HFA loans, so be sure to check with your local agency for specifics. Use this locator to find your state’s HFA. However, these programs often share certain characteristics. For example, many require a credit score of 620 or better and offer the following benefits:

  • Assistance with closing costs 

  • Competitive interest rates 

  • Down payments as low as 3% 

  • Tax credit program to minimize the financial impact of mortgage interest 

Many of these programs require buyers to participate in borrower education classes, either virtually or in person. Sometimes these programs are in the form of counseling sessions with prospective borrowers.

These loans are not exclusively run by state agencies. They are generally provided through lender partners and insured by Freddie Mac and Fannie Mae.

5. HomeReady and Home Possible Loans 

Fannie Mae and Freddie Mac are both mortgage companies that operate under Congressional charters to help stabilize the United States mortgage market. Fannie Mae offers HomeReady loans, and Freddie Mac offers Home Possible loans. These programs are similar but not identical.

Both programs require borrowers to have incomes below 100% of the local median income with exceptions for certain localities. HomeReady requires a minimum credit score of 620, and Home Possible requires scores of 660 or greater. With a HomeReady mortgage, you can only purchase a single-unit residence that you will use as your primary residence. You can use a Home Possible loan for a single or multi-unit property that may or may not be your primary residence.

All HomeReady borrowers must complete homeownership counseling or education. The Home Possible program only imposes educational requirements on first-time homebuyers or those purchasing a multi-unit property.

HomeReady loans offer special flexibilities to public servants, military personnel and individuals with disabilities. Home Possible loans do not confer any advantages to special populations.

Get Started Today 

No matter what type of loan you are considering, it is always a good idea to gather as much information as you can early in the process. Doing so allows you to start gathering your documents and otherwise preparing for the loan-application process. Contact us today for more information regarding mortgage options for which you may qualify.