How to buy a house on a low income – Forbes Advisor


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Home prices have skyrocketed, making it increasingly difficult for low-income potential buyers to get a foot on the property ladder. For low-income people, it may seem like there are too many barriers to getting a mortgage, whether it’s the down payment requirement, the debt ratio limit -income (DTI) or having good credit rating. But there are mortgage options specifically designed for low-income borrowers to access home ownership.

Types of Loans for Low-Income Mortgage Applicants

Individual lenders may have their own programs designed for low-income mortgage borrowers, but the most common types of these loan programs are guaranteed or issued through a government program. Here are some of the most popular programs.

USDA Loans

The United States Department of Agriculture (USDA) provides homeownership opportunities for low- and middle-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 mortgages are provided directly by USDA Rural Development. Funding is also available as a loan from a lender and guaranteed by USDA Rural Development for qualified borrowers. None of these home loan programs require a down payment.

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

The Section 502 Secured Loan Program works with approved lenders to provide low- and middle-income households with mortgage loans to purchase homes in eligible rural areas. The program offers a 90% guarantee to approved lenders to reduce the risk of providing 100% loans to eligible rural home buyers. Borrowers do not have to deposit any money with this program.

How do I qualify for a USDA loan?

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

  • The home you buy must be your primary residence
  • You must demonstrate that you can manage your debts
  • Have a DTI ratio of 41% or less
  • Income limits for USDA loans vary by program and location. For secured loans, your income cannot exceed 115% of the median income in your area. Income caps for direct-issue loans are much lower, as low as 50% of median income in some areas.

FHA Loans

Federal Housing Administration (FHA) loans are issued by approved, FHA-insured lenders to help low- and middle-income borrowers purchase 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.

For this reason, FHA mortgage interest rates can be a bit higher.

How do I qualify for an FHA loan?

There are specific requirements you must 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 accommodation must be your main residence
  • The home must be appraised by an FHA-certified appraiser
  • Property will need 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 higher; or 90% if your score is below 580
  • There is a maximum loan amount which varies depending on the type of property and the cost of living in your area.

HFA loans

Another affordable mortgage option is 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 aim to promote homeownership and increase mortgage affordability for first-time homebuyers as well as low-income households. low and medium.

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

How can I qualify for an HFA loan?

Although HFA program requirements vary from state to state, general requirements include:

  • You don’t have to be a first-time home buyer. However, you cannot own any other property at the time of settlement.
  • Your income cannot exceed a certain level. Your eligibility will be determined based on your personal income, rather than your overall household income.
  • A minimum required credit score lower than conventional mortgages

Other HFA Home Ownership Programs

These programs include low interest or low (or zero) down payment mortgage products. They can also 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 every year. calendar year.

  • Help with down payment and closing costs: HFAs offer a grant or second mortgage to cover your down payment and/or closing costs. Most HFAs require these down payment assistance programs to be used in conjunction with an HFA loan.
  • Mortgage Tax Credit Certificates: The MCC is a tax credit program designed to help first-time home buyers offset some of their mortgage interest on a new mortgage. It gives you a dollar-for-dollar credit on your federal income tax, based on a specific percentage of the mortgage interest paid by the borrower.

HomeReady and HomePossible

Mortgage giants Fannie Mae and Freddie Mac offer HomeReady and Home Possible mortgage products respectively. They allow low-income homebuyers to finance up to 97% of their home purchase, which means 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 earn no more than 80% of the median income in their area.

Home HUD

When a home purchased with an FHA mortgage is foreclosed, the Department of Housing and Urban Development (HUD) attempts to recoup some of its losses by selling the home at auction as a HUD home.

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

HUD Homeownership Voucher Program

The Housing Choice Voucher (HCV) homeownership program allows families who receive assistance under the HCV program (also known as “Section 8”) to use their voucher to purchase a home and receive monthly assistance to meet home ownership expenses.

You can use the VHC homeownership program if you have been admitted to the VHC program. However, it is not offered by all local public housing agencies (PHAs). HUD leaves PHAs with the discretion to determine whether to implement the HCV homeownership program in their jurisdiction.

If your PHA offers this program, you will need to meet income requirements as well as employment requirements if you are not elderly or disabled. You must also be a first-time home buyer and complete a homeownership counseling program. There may be additional requirements defined 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 is offering a 50% discount off the list price of the house. In return, however, you must agree to live in the property for three years as your main residence. You must also choose a property in an area deemed to be revitalized.

Additional tips for buying a low-income home

Here are some steps you can take to become 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, reducing your debt, and keeping your credit usage, such as credit card usage, as low as possible.

Save for a deposit

Unless you can get a no-down payment mortgage option or down payment assistance, you should save for the down payment and closing costs. Figure out how much you’ll need, then create a plan for how you’ll save for it.

Use a co-signer

In some cases, a spouse or parent may co-sign your mortgage. In these situations, the co-signer’s financial and credit information could improve your chances of being approved.

Pay off the debt

If you can reduce the total amount of debt you owe, you lower your DTI ratio, which can improve your chances of being approved for a mortgage and increase the amount you can borrow.

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