How To Buy A House With Low Income (2024)

House prices have skyrocketed, making it increasingly difficult for potential buyers with low incomes to get a foot on the property ladder. For people with low income, it may seem like there are too many obstacles to getting a mortgage—whether it’s the down payment requirement, debt-to-income (DTI) ratio limit or having the right credit score. But there are mortgage options specifically designed for low-income borrowers to achieve homeownership.

Types Of Loans For Low-Income Mortgage Applicants

Individual lenders may have their own programs built for low-income mortgage borrowers but the most common types of these loans programs are backed or issued through a government program. Here are some of the more popular programs.

USDA Loans

The U.S. Department of Agriculture (USDA) provides homeownership opportunities to low- and moderate-income Americans through several loan, grant and loan guarantee programs. However, you must live or plan to live in an eligible rural area to qualify.

These low-interest, fixed-rate mortgage loans are provided directly by USDA Rural Development. Financing is also offered in the form of a loan from a lender and guaranteed by USDA Rural Development for qualified borrowers. Neither of these home loan programs require a down payment.

For example, the USDA’s Section 502 Direct Loan Program assists those with low and very low income to live in eligible rural areas by providing payment assistance to improve their ability to repay the mortgage—a key metric lenders look at to determine whether to approve a loan. The amount of payment assistance is determined according to your income.

The Section 502 Guaranteed Loan Program works with approved lenders to provide low- and moderate-income households with mortgages to buy homes in eligible rural areas. The program provides a 90% guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural homebuyers. Borrowers do not have to put any money down with this program.

How do I qualify for A USDA loan?

In addition to buying in an eligible location, other specific USDA loan requirements include:

• The home you are buying must be your primary residence
• You must demonstrate you can manage debt
• Having a DTI ratio of 41% or lower
• Income limits for USDA loans vary by program and location. For guaranteed loans, your income can’t exceed 115% of the median income for your area. Income limits for direct-issue loans are much lower—as low as 50% of the median income in certain areas.

FHA Loans

Federal Housing Administration (FHA) loans are issued by approved lenders—and insured by the FHA— to help low- and moderate-income borrowers buy homes. An FHA borrower can qualify with a lower credit score than required for conventional mortgages and buy a home with a smaller down payment compared to other loan options.

Because of this, FHA mortgage interest rates may be somewhat higher.

How do I qualify for an FHA loan?

There are specific requirements you need to meet to qualify for an FHA loan:

• A minimum credit score of 500
• A minimum down payment of 3.5% of the purchase price
• The home must be your primary residence
• The home must be appraised by an FHA-approved appraiser
• The property will have to be inspected to ensure it meets minimum eligibility standards
• A maximum loan-to-value (LTV) ratio of 96.5% if your credit score is 580 or more; or 90% if your score is under 580
• There’s a maximum loan amount that varies by property type and the cost of living in your area

HFA Loans

Another affordable mortgage option is the financial assistance provided by your state’s Housing Finance Agency (HFA), usually in partnership with a local lender. HFA homeownership programs differ by state, but all are aimed at promoting homeownership and increas­ing mortgage affordability for first-time homebuyers as well as low- and moderate-income households.

HFAs provide first-lien mortgage products for eligible borrowers that require very little money down and offer reduced interest rates, as well as down payment and closing cost assis­tance. Once these loans are made, HFAs buy them from the lenders.

How do I qualify for an HFA loan?

Though HFA program requirements will vary by state, general requirements include:

• You don’t need to be a first-time homebuyer. However, you cannot own any other property at time of settlement.
• Your income may not exceed a certain level. Your eligibility will be determined based on your personal income, rather than your entire household income.
• A minimum credit score requirement that is lower than conventional mortgage loans

Other HFA Homeownership Programs

These programs include low interest-rate, or low (or zero) down payment mortgage products. They also may offer down payment and clos­ing cost assistance as well as mortgage tax credit certificates, which allow you to claim a federal tax credit of 20% to 40% of the mortgage interest you pay each calendar year.

• Down payment and closing cost assistance: HFAs offer a grant or a second mortgage loan to cover your down payment and/or closing costs. Most HFAs require that these downpayment assistance programs be used in conjunction with an HFA loan.
• Mortgage tax credit certificates: The MCC is a tax credit program intended to help first-time homebuyers offset a portion of their mortgage interest on a new mortgage. It gives you a dollar-for-dollar credit against your federal income tax liability, by a specific percentage of the mortgage interest paid by the borrower.

HomeReady and Home Possible

Mortgage giants Fannie Mae and Freddie Mac offer the HomeReady and Home Possible mortgage products, respectively. They allow low income homebuyers to finance up to 97% of their home purchase, meaning you can make down payments as low as 3%.

There are some differences between the two programs, but they both have similar requirements, including that borrowers make no more than 80% of the median income for their area.

HUD Home

When a home bought with an FHA mortgage is foreclosed on, the Department of Housing and Urban Development (HUD) tries to recoup some of its losses by auctioning off the home as a HUD Home.

These homes are typically sold below market value, making them an attractive option if you can’t compete on the regular housing market. Just be aware that you might be buying a home in need of serious repair or updates. And the transaction might take longer or be more complicated if you need financing.

HUD Homeownership Voucher Program

The Housing Choice Voucher (HCV) homeownership program allows families that receive assistance under the HCV program (also known as ‘Section 8’) to use their voucher to buy a home and receive monthly assistance to meet homeownership expenses.

You can use the HCV homeownership program if you have been admitted to the HCV program. However, it is not offered by every local Public Housing Agency (PHA). The HUD allows PHAs the discretion to determine whether to implement the HCV homeownership program in their jurisdictions.

If your PHA does offer this program, you’ll need to meet income requirements as well as employment requirements if you aren’t elderly or disabled. You also need to be a first-time homebuyer and complete a homeownership counseling program. There might be additional requirements set by your PHA.

HUD ‘Good Neighbor Next Door’ Program

Good Neighbor Next Door is a HUD program that helps law enforcement officers, teachers, firefighters and emergency medical technicians become homeowners. HUD offers a discount of 50% from the list price of the home. In return, however, you must commit to live in the property for three years as your principal residence. You must also choose a property in an area deemed in need of revitalization.

Additional Tips For Buying A House With Low Income

Here are some steps you can take to make yourself a more attractive borrower.

Work On Your Credit Score

If your current score isn’t ideal, you can work to improve it by paying your bills on time, lowering your debt and keeping your credit utilization, like credit card usage, as low as possible.

Save For A Down Payment

Unless you can get a no-money-down mortgage option, or down payment assistance, you need to save up for a down payment and closing costs. Determine how much you’ll need and then create a plan for how you’ll save for it.

Use A Co-Signer

In some cases, it’s possible to have a spouse or relative co-sign your mortgage loan. In these situations, the co-signer’s financial and credit information could improve your chances of being approved.

Pay Off Debt

If you can decrease the total amount of debt you owe, you’ll lower your DTI ratio, which can improve your odds of being approved for a mortgage—and increase the amount you can borrow.