Low-Income Home Loans: What Are Your Options?

A family celebrates their first day in their new home. — Photo:
Hinterhaus Productions/Getty Images

Buying a home when you don’t have much income every month can seem impossible. However, there are a variety of loan programs that could make homeownership possible.

Learn what these programs are, how they work, and what you need to do to qualify for them.

Low-Income Home Loan Overview

There are several low-income home loan options to choose from. Some are outright loans while others provide assistance to purchase a home. We’ll cover the following programs below:

Fannie Mae HomeReady mortgage
Freddie Mac Home Possible loans
Federal Housing Administration (FHA) loans
Department of Agriculture (USDA) loans
Good Neighbor Next Door
Veterans Affairs (VA) loans

Fannie Mae HomeReady Loans

A Fannie Mae HomeReady mortgage is an appealing option for low-income homebuyers for several reasons. The loan’s mortgage insurance is discounted, you can cancel it once your home’s loan-to-value ratio hits 80%, and your loan doesn’t have geographical restrictions like USDA loans have.

Fannie Mae HomeReady mortgages are available to borrowers with a maximum income of 80% of the median income in their area. The lender provides a convenient income lookup tool to determine area median income limits by city and state. Both first-time and repeat homebuyers can qualify for a Fannie Mae HomeReady mortgage.

Basic eligibility requirements:

Income: 80% of the area median income (AMI)
Credit score: 620
Down payment: As low as 3%

Freddie Mac Home Possible Loans

The Freddie Mac Home Possible mortgage is another low-income option for homebuyers. It’s a good fit for low-income prospective homeowners because it allows down-payment assistance from family members, employers, and other sources. For example, a newlywed couple could use wedding-gift funds for the down payment. The program also provides flexibility for borrowers who won’t be able to sell their current home before closing on the new home.

In addition, the program allows co-borrowers who live in separate homes to be non-occupying borrowers (a benefit for homebuyers who use co-signers). Plus, borrowers can access the Home Possible income and property eligibility tool to determine the mortgage qualifications based on the address of the home they want to purchase.

Basic eligibility requirements:

Income: No more than 80% of the AMI
Credit score: 660
Down payment: As low as 3%

FHA Loans

FHA loans are a popular option because you’re still eligible for an FHA loan if you’ve had a foreclosure or bankruptcy in your recent history, factors that would normally disqualify you for a mortgage.

According to the terms of FHA loan requirements, your credit score would determine how much your down payment would be. Also, you can put toward your down payment monetary gifts from family members, employers, close friends, and charitable organizations.

Basic eligibility requirements:

Debt-to-income ratio: Up to 43%
Credit score: At least 500
Down payment: 10% for a credit score of 500 to 579; 3% for a credit score of 580 or above

Note

You can apply for an FHA loan two years after a bankruptcy discharge and three years after a foreclosure.

USDA Loans

The USDA helps people with low or very low incomes in rural areas to purchase homes without a down payment, in most cases.

However, to qualify for a USDA loan, you have to meet the following requirements:

Must be without safe, decent, and sanitary housing
Can’t get a mortgage from another source that they could repay
Must not be suspended from participating in federal programs
Agree to make the home your primary residence

The home itself must be located in a designated rural area (the USDA offers a search tool to find eligible areas) and, in general, the home has to be 2,000 square feet or less.

Basic eligibility requirements:

Income: Cannot exceed the low-income limit for the area where you want to buy your home
Credit score: Typically at least 640
Down payment: Not required, in most cases

Good Neighbor Next Door

The Housing and Urban Development (HUD) provides a Good Neighbor Next Door program for borrowers who work full time in certain occupations, such as pre-K through 12th-grade teachers, firefighters, emergency medical technicians, and law enforcement officers. These homes must be located in revitalization areas and must be for sale as a part of the Good Neighbor Next Door Sales program.

HUD makes qualifying homes affordable by providing a 50% discount on the list price of the home. To qualify, you’ll have to meet the employment requirements and commit to live in the home for at least 36 months.

Good Neighbor Next Door homes are available for the program for seven days only. If multiple buyers make an offer on a Good Neighbor home, the winner is chosen through a random lottery.

Note

Down payments on Good Neighbor homes can be as low as $100.

Basic eligibility requirements:

Employment status: Must be employed full time in a qualifying field
House location: Designated FHA revitalized areas
House status: Home must be a Good Neighbor Next Door Sales property

VA Loans

A VA-backed mortgage helps low-income borrowers because it provides competitive interest rates and does not require private mortgage insurance or, in most cases, a down payment. The loan can be used to purchase a home or condo, build a new home, or even make changes to an existing home to make it more energy efficient..

Current servicemembers, veterans, and surviving spouses are eligible for the loan program.

Note

VA loans are actually provided by private lenders, and the VA guarantees a portion of them, which results in more affordable loan terms.

Basic eligibility requirements:

Eligibility: Must be an eligible servicemember, veteran, or surviving spouse
Credit score: At least 640, in most cases
Down payment: Not required for 90% of borrowers

How To Improve Your Chances of Getting a Low-Income Loan

Although several programs don’t penalize low-income homebuyers, there are other requirements, so approval is not automatic.

“Two ways for borrowers to improve their chances of qualifying for and obtaining an FHA or any other loan is to limit their delinquencies and ensure their down payment is saved in a bank account,” said Jeff Gravelle, chief product officer at mortgage lender NewRez.

He recommends doing your research and working with a mortgage expert to learn about the options you may qualify for. For example, FHA loans require down payments but require you to buy a home in a designated rural or revitalization area, so it’s a good fit if you want the freedom to choose where you live. But if you’re a full-time first responder or teacher and you can’t save up a down payment, you may want to consider a Good Neighbor or USDA loan.

Frequently Asked Questions (FAQs)

Can you buy a house with a low income?

Fortunately, having a low income won't disqualify you from a mortgage since there are so many loan options in this category.

“What matters is how your income matches up to your debts and, in general, no more than 45 cents of every dollar earned should be previously committed to a debt,” Dan Green, CEO of Homebuyer, a mortgage lender for first-time homebuyers based in Austin, told The Balance by email.

The lower your debt-to-income ratio, the more cushion you have in your budget to bring on a mortgage payment.

“One way to offset a high debt-to-income ratio is to raise your credit score—and most homebuyers can improve their credit scores in as little as 90 days, which can mean the difference between getting approved to buy a home or not getting approved,” Green said.

You can improve your credit score by paying your bills on time and keeping balances on your credit cards as low as possible.

How do you get a mortgage with a low income?

While you won’t be penalized for having a low income, some of the other qualifications are similar to applicants who are middle- or high-income earners.

“Documentation of income is essential, which is typically paycheck stubs for those who are employed, tax returns for the self-employed, and can also include documentation of long-term benefits such as Social Security,” Jorge Newbery, chairman and CEO at AHP Servicing in Chicago, told The Balance by email. “Also, lenders typically require that borrowers have minimum credit scores.”

Generous allowances are made regarding credit scores. However, a low credit score could result in a higher interest rate and down payment.

Can you get government help to buy a house?

Yes, multiple government programs offer or back mortgage loans with favorable terms for borrowers with low income.

For most borrowers looking for low-income home options, your best bet is going to be an FHA mortgage, Gravelle said.

“They are insured by the government and are popular with many homeowners, first-time buyers, and borrowers who might not normally qualify for other types of loans,” Gravelle said. “FHA mortgages offer flexible credit qualifying requirements and loan terms such as low down payments, low interest rates, and low closing costs to help more people achieve homeownership.”

In addition, Green said that help may be available on a local level.

“In some municipalities, governments offer forgivable loans, which help renters to become homeowners,” he said.

Can you buy a house with no down payment?

Yes, homebuyers can purchase a home with no down payment. In many cases, borrowers don’t have to provide a down payment for VA and USDA loans.

What are rates for low-income home loans?

Rates for your mortgage should be similar to people with higher income, provided you have the same credit scores, DTI, and other factors.

“Mortgage rates don't change because a homebuyer’s income is low,” Green said. “However, mortgage rates do change because of credit scores, and as credit scores rise, mortgage rates drop.”

Green recommended limiting your debts and increasing your credit score to get a better rate.

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