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What Sort of Low-Income Home Loans Are Available?

Having a relatively low income doesn’t automatically disqualify you from buying a home. There are low-income home loans available to help you reach your goal of homeownership. Depending on other important factors such as your credit score, existing debt, location and profession, you may qualify for a home loan through one of the following programs.

  1. Fannie Mae HomeReady loans
  2. Freddie Mac Home Possible® loans
  3. FHA loans
  4. Good Neighbor Next Door program
  5. VA loans
  6. USDA loans

1. Fannie Mae HomeReady loans

The HomeReady mortgage program from Fannie Mae offers low-income home loans to prospective homebuyers with limited cash for a down payment. Underwriting guidelines are more flexible to make it easier for borrowers to qualify.

Both first-time homebuyers and repeat buyers are eligible. If all borrowers on a loan are first-timers, at least one borrower must meet the homeownership education requirement. They can do so by completing an online course on the Framework website.

Eligibility requirements include:

  • Having a minimum 620 credit score
  • Contributing a minimum 3% down payment
  • Earning a maximum 80% of the area median income (AMI)

2. Freddie Mac Home Possible® loans

Freddie Mac’s Home Possible® mortgage program also caters to low- and moderate-income borrowers with limited down payment funds.

Both first-time and repeat homebuyers may qualify, and even those who have another financed property at time of borrowing may still be eligible for the program. At least one borrower must complete a homeownership education course if all borrowers on a Home Possible loan are first-time buyers.

Eligibility requirements include:

  • A minimum 660 credit score
  • A minimum 3% down payment
  • An income less than or equal to 80% of the AMI

3. FHA loans

The Federal Housing Administration (FHA) insures FHA loans funded by approved lenders. Because they have looser requirements, FHA loans can be a good option for first-time homebuyers who may not qualify for a conventional loan or are struggling to save a 20% down payment.

You could qualify for an FHA loan with a 500 credit score, but you’ll be required to make a larger down payment. All borrowers are required to pay upfront and annual mortgage insurance premiums, no matter their credit score or down payment amount. FHA borrowers putting the minimum 3.5% down pay FHA mortgage insurance for the life of the loan.

Eligibility requirements include:

  • A 500 to 579 credit score and minimum 10% down payment
  • A 580 credit score and minimum 3.5% down payment
  • Meeting your county’s FHA loan limits

4. Good Neighbor Next Door program

The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development allows homebuyers in eligible public service careers the opportunity to purchase a home at a 50% discount. If you use an FHA loan to buy your home under the program, the minimum required down payment is $100. You can also use a conventional or VA loan.

Eligibility requirements include:

  • Working full-time as a pre-K through 12th-grade educator, emergency medical technician, firefighter or law enforcement officer
  • Buying a home in a HUD-designated revitalization area
  • Committing to live in the home for at least three years

5. VA loans

The U.S. Department of Veterans Affairs (VA) offers a mortgage program to help veterans, servicemembers and surviving spouses purchase homes. The VA is not a direct mortgage lender, but it does guarantee a portion of the loan so borrowers can receive more favorable loan terms like a lower interest rate.

VA loans don’t have a minimum required down payment or mortgage insurance requirement. However, they do charge a VA funding fee, which varies depending on your down payment amount. The loans also limit the amount you can be charged for closing costs, and the seller may pay closing costs. Additionally, there are no VA loan limits — as of January 2020.

Eligibility requirements include:

  • A valid Certificate of Eligibility
  • A preferred minimum 620 credit score
  • A required VA funding fee to offset program costs to taxpayers

6. USDA loans

The U.S. Department of Agriculture also insures low-income home loans provided by approved lenders up to 90% of the loan amount. USDA loans are catered to homebuyers with a modest income and don’t require a down payment.

Eligibility requirements include:

  • Having a preferred 640 credit score
  • Meeting local income eligibility requirements
  • Purchasing a home in a designated rural area

Tips for buying a house with a low income

  • Improve your credit profile ahead of time. Review your credit reports and dispute any errors you find. Pay all of your accounts on time and lower your credit usage to below 30% of your available limit. This may help improve your credit score before you apply for a mortgage.
  • Increase your income or lower your DTI ratio. If you have the time, pick up a side hustle to increase your income to save up for closing costs and a down payment. You should also pay down your outstanding debt, especially credit card balances, which can help lower your debt-to-income (DTI) ratio.
  • Get a mortgage preapproval. Home sellers are likely to take you seriously if you have a mortgage preapproval when you put in an purchase offer. A preapproval tells you how much a lender might be willing to lend you, based on a review of your overall financial picture.
  • Choose your real estate agent wisely. Focus on finding a real estate agent who is knowledgeable about local housing conditions, as well as local and national homebuying programs for low-income borrowers.
  • Look for homebuying assistance programs. Check with your state’s housing finance agency for available homebuying assistance programs, including grants or loans to help cover your down payment or closing costs.
 

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