How to buy a low income home
If you have a stable job but earn less than you would like, you may be worried that it will hamper your ability to buy a home. The good news: There are mortgages and support options that can help you become a homeowner, even on a low income.
Can I buy a house on a low income?
The short answer: Yes, you can buy a low-income home, with mortgage programs designed for low- to moderate-income borrowers.
“Having low income can increase your debt-to-income ratio (DTI). This limits some of the loan program options you may be eligible for, but it doesn’t mean you absolutely can’t buy a home, ”says Balenda Hetzel, regional production manager at Inlanta Mortgage, headquartered in Pewaukee. , Wisconsin.
Low Income Mortgages and Help
1. HomeReady mortgage loan
Fannie Mae’s HomeReady Mortgage Program addresses one of the challenges of buying a low-income home by requiring just 3% as a down payment. With this loan, your down payment and / or closing cost funds can come from sources other than savings, including grants and gifts, and you do not need to contribute personally.
To qualify, your income cannot exceed 80% of the area’s median income (AMI) for the place where you buy a home. (You can search for local limits using Fannie Mae’s tool.)
While you can deposit as little as 3% with a HomeReady mortgage, you will be required to pay for mortgage default insurance. However, these insurance premiums can be waived once you reach 20% of your home equity. You’ll pay for mortgage insurance with your monthly mortgage payment, so it will increase that cost, but it’s easy to get by once you hit that 20%.
Plus, you can add a co-borrower to a HomeReady mortgage even if they don’t intend to live in the home.
“Unlike other home loans, not all borrowers have to reside in the property,” says Roselina D’Annucci, a New York-based real estate lawyer with the law firms Serrano and Associates, PC. Living in the house can be co-borrowers on the loan to help their children qualify for a mortgage.
With a HomeReady mortgage, your mortgage lender can also take into account your rental payment history to help you qualify for the loan, D’Annucci adds.
2. Home Mortgage possible
Like a HomeReady mortgage, the Freddie Mac Home Possible mortgage only requires a 3% down payment, and down payment funds can come from a number of sources, including family members, home help programs. employer and even equity (if you have the skills to provide labor or materials to renovate the house, that is).
Similar to HomeReady, your income cannot exceed 80% of the MAI with a Home Possible mortgage, and there is a mortgage loan insurance requirement as well.
“There are also a few other conditions: If you are a first-time buyer, you will need to take a homeownership education program,” adds Tabitha Mazzara, director of operations at MBANC, a mortgage lender.
The class requirement for first-time buyers also applies to the HomeReady program.
3. FHA loan
An FHA loan, which is backed by the Federal Housing Administration, can be obtained for as little as 3.5% if your credit score is 580 or higher.
“This loan has less stringent requirements that can help low-income borrowers or those with bad credit history,” says Gerwin Wallace, mortgage originator at Silverton Mortgage in Anniston, Alabama. “You can also pay lower closing costs with this loan. “
If your down payment is less than 10%, however, FHA loans come with lifetime mortgage insurance (in other words, it cannot be canceled), which can be a downside, and the house that you wish to purchase must pass an assessment to ensure that it complies with FHA safety guidelines.
4. VA loan
Perhaps the most generous type of low-income mortgage is a VA loan, which is available to active duty members, veterans, and surviving spouses. With a VA loan, you don’t have to put money or mortgage insurance, closing costs can be lower than other loans, and you might get a lower interest rate than others. financing options.
Plus, the VA loan is a lifetime benefit; this means that if you are eligible, you can get a VA loan multiple times.
However, you will need to pay a financing fee for this mortgage, the amount of which depends on whether you have already had a VA loan and how much down payment you make, if any. This is an additional cost to consider.
To be eligible for a VA loan, “you must have good credit, stable income, and a VA eligibility certificate,” says Mazzara. “Also, your loan amount should not exceed the appraised value of the house. “
5. USDA loan
Another generous mortgage program is the USDA loan, which, like the VA loan, does not require any down payment. You also don’t have to be a first-time buyer to get a USDA loan.
However, the accommodation must be located in a eligible rural area, which means you might only qualify if you’re buying away from a city or urban location – although many suburban areas are also eligible for USDA funding, according to Wallace.
Additionally, your income cannot exceed 115% of the MAI, and you will also pay mortgage insurance with this loan, in the form of an upfront guarantee commission and then an annual fee.
6. Good Neighbor Next Door Program
Good Neighbor Next Door is a home buying program available to law enforcement officers, teachers, firefighters, and emergency medical technicians. The program, administered by the US Department of Housing and Urban Development (HUD), allows borrowers to purchase a home at 50% of the list price in exchange for living in the property for at least three years.
However, the home must be a property in a “revitalization zone” determined by the HUD and listed for sale through the program, and the listings are only available for purchase for seven days. You will also need to get a second mortgage and note to qualify for the rebate, but you won’t be required to pay the second mortgage or any interest on it, as long as you meet the three-year residency requirement. .
7. HFA loan
Not to be confused with an FHA loan, an HFA loan is another type of low income mortgage through Fannie Mae (called “HFA Preferred”) and Freddie Mac (called “HFA Advantage”) that only requires a 3% down payment. of funds. HFA loans are available through state housing finance agencies (HFAs), which partner with mortgage lenders to provide affordable loans to low-income borrowers. In many cases, you don’t have to be a first-time buyer to qualify, and you may also be eligible for down payment assistance.
8. Down payment assistance programs
There are a variety of down payment assistance (PAD) programs, and they are generally intended for low- to moderate-income borrowers. These programs usually come in the form of a grant (free money) or a loan, the latter of which may need to be repaid or be eligible for a discount after a certain period of time.
9. Mortgage loan certificate
A Mortgage Credit Certificate (CMC) is a federal tax credit that can help low- and moderate-income buyers or first-time buyers offset a portion of the money they owe in mortgage interest. Unlike a tax deduction, MCCs offer a dollar-for-dollar tax credit of up to $ 2,000 to eligible individuals each year. However, an MCC is not free, so if you qualify, consult a tax professional to find out if it’s the right decision for you. Often times, the savings on a 30-year mortgage will exceed the upfront costs.
10. Loans for manufactured houses and mobile homes
Interested in a prefab or mobile home? There is special financing for this type of property which may be ideal for low income borrowers.
“For example, MH Advantage is a Fannie Mae loan program designed to finance manufactured homes,” says Wallace. “It offers low payment options, low monthly payments and reduced interest rates compared to most standard manufactured home loans. In addition, it offers the possibility of combining HomeReady, the HFA Preferred mortgage loan and other mortgage programs without being tied to a specific program.
How to qualify for a low income mortgage
To improve your chances of qualifying for a low-income mortgage, it’s worth preparing.
“I advise potential buyers to improve their credit rating and their credit reports,” says Mazzara. “That way you will be eligible for loans with lower interest rates.
This includes paying off your credit card and revolving debt balances, paying bills on time, correcting any errors you spot on your credit reports, and not opening new or new credit accounts. lines of credit in the weeks leading up to your mortgage application, Wallace says.
“Also, meet with a trusted mortgage lender who can give you a better understanding of what you qualify for and what is needed for a loan,” Hetzel adds. “Meeting with a lender early in the process gives you time to work on improving your credit and saving the funds you need at closing. “