Can You Buy a House With Low Income? | Mortgages and Advice

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Buying a home can be challenging if you have low income, but it’s an important step toward building assets and growing your net worth. Loans for low-income borrowers can make homeownership more achievable.

What Is a Low-Income Home Loan?

A low-income home loan is a mortgage that homebuyers can qualify for even if they don’t have substantial earnings.
Some types of home loans set income limits. Others are open to people with higher incomes but don’t exclude low-income borrowers.

Private lenders issue low-income home loans that are insured by government agencies or by Fannie Mae or Freddie Mac, the government-sponsored enterprises that back most conventional mortgages in the U.S. Certain government agencies also issue specific types of mortgages directly to borrowers.

The loan types listed below may make homeownership more accessible if you are a low-income borrower.

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FHA Loans

FHA loans are offered by private lenders and guaranteed by the Federal Housing Administration. An advantage of FHA loans is that the eligibility requirements are flexible.

“You don’t have to have perfect credit for it. You can have had some previous dings,” says Derrick Nutall, vice president on Citi Mortgage’s community lending team.

Borrowers can qualify for an FHA loan with credit scores of 580 or above and down payments of at least 3.5%, or with credit scores of at least 500 and down payments of at least 10%.

The FHA doesn’t set income limits for borrowers, though your mortgage payment typically cannot be more than 31% of your income, and your overall debt-to-income ratio, or DTI, typically cannot be more than 43%. Higher ratios may be allowed in manual underwriting.

FHA loans require borrowers to purchase mortgage insurance, which protects the lender in case a borrower doesn’t repay a loan. An upfront premium of 1.75% of the loan amount is due when the loan closes, and annual premiums of 0.45% to 1.05% of the loan amount are charged for at least 11 years after that. You can borrow more to cover the upfront premium, then pay it back along with the rest of your loan.

USDA Loans

The Department of Agriculture backs loans from private lenders and issues direct loans to homebuyers in qualifying areas where the population is under 35,000.

“It’s a program that people don’t think about because they think of rural communities, and many suburbs actually are eligible for that,” says Nathan Vogt, certified mortgage banker and president of the mortgage division at First Horizon Bank.

Generally, neither guaranteed nor direct USDA loans require a down payment, and that can help low-income applicants buy a home sooner. There’s no set minimum credit score for either loan type.

You may qualify for a single family home loan backed by the USDA if your household income isn’t more than 115% of the median household income for the area. Guaranteed loans allow your housing costs to make up at most 29% of your income, and your DTI ratio can be up to 41%. The USDA charges guarantee fees to the lender, and the lender can pass those costs along to the borrower.

Homebuyers may qualify for USDA direct loans if they meet income requirements and lack safe housing. They also have to be unable to get any other type of home loan with reasonable terms.

Typically, direct loans from the USDA have terms of 33 years, though it’s possible to get a shorter term or a term of 38 years in some cases. There’s no mortgage insurance on a USDA direct loan.

VA Loans

The Department of Veterans Affairs guarantees loans for eligible members of the military and veterans, including qualified members of the Reserve forces and the National Guard. Surviving spouses of veterans can qualify, too.

VA loans usually don’t require a down payment, and they typically provide better interest rates than conventional loans. Another plus is that the VA keeps closing costs low. There’s no minimum credit score for VA loans, though lenders may require a minimum credit score of at least 580. You usually need a DTI ratio of 41% or less, but higher ratios are allowed in some cases.

Most borrowers have to pay the VA funding fee, which works like mortgage insurance. On guaranteed loans, the fee ranges from 1.25% to 3.3% of the amount you’re borrowing to buy a home, depending on whether you’re making a down payment and whether it’s your first time taking out a VA loan.

The VA also issues loans itself through the Native American Direct Loan program. These loans are an option for Native American veterans and veterans with Native American spouses who want to buy a home on eligible tribal lands. The funding fee for a Native American Direct Loan is 1.25% of the loan amount.

HomeReady Loans

HomeReady loans are Fannie Mae’s offering for homebuyers with low or moderate income. HomeReady loans allow down payments of just 3%.

To qualify for a HomeReady loan, your income must be no more than 80% of the area median income. The minimum credit score is 620, but lenders can look at nontraditional measures of credit. And your DTI ratio must be no higher than 50%.

Gifts and grants can be used to cover the entire down payment, which could be helpful for borrowers who don’t have much savings.

As with other conventional loans, you may be able to stop paying mortgage insurance on a HomeReady loan once you’ve built up 20% equity in the home. “If you end up having a lot of appreciation, you may be able to lower your payment sooner because of the ability to cancel mortgage insurance,” Vogt says.

Home Possible Loans

Home Possible is a loan program from Freddie Mac that’s largely comparable to HomeReady.

Borrowers can qualify with income as high as 80% of the area median income.

Like HomeReady, Home Possible allows a down payment as low as 3%. Borrowers can use funding sources including family and employer assistance to cover the down payment.

HFA Assistance

State Housing Finance Agencies are nonprofits that work to make homeownership accessible. They offer home loans with low down payments and low interest rates, plus grants and loans to help low-income borrowers cover down payments. Homebuyer education is often required.

How Can You Buy a Home With Low Income?

If you have low income and you want to start shopping for a home, it’s important to stay informed about the homebuying process and make a plan.

  • Take stock of your finances and create a budget. Having a clear picture of your income, expenses and credit can help you determine if you’re ready to buy a home and figure out which loans are realistic for you. “That is where we are seeing too many individuals staying on the sidelines, because they’re not taking the first step,” Nutall says.
  • Find someone to guide you through the process. A housing counselor can provide objective advice and help you explore your options. You can also get information from a loan officer or realtor you trust.
  • Start homebuyer education as soon as possible. Even if you don’t choose a loan that requires it, you can still benefit from learning about the process in an online course from Fannie Mae or Freddie Mac. “They walk you through some of those questions you need to be thinking about: ‘Do I have enough money for a down payment? What are some of the different expenses that I should expect as a homeowner?'” Vogt says.
  • Get preapproved. Preapproval lets you know if you have a good chance of getting a loan, and it shows sellers that your finances are in order. “Many realtors will actually ask for a preapproval prior to working with you, so it’s absolutely a must,” Vogt says.
  • Prepare for your down payment and closing costs. Check with lenders and your housing finance agency to see if you qualify for grants. If you need to fund your down payment yourself, create a plan to save up for it.
  • Look for a home you can afford. Your monthly payment should fit comfortably into your budget – and that might mean borrowing less than the maximum you’re approved for. Experts often recommend spending no more than 28% of your gross income on housing, and no more than 36% on all debt.

Can I Buy a House If I Make $25,000 a Year?

You might be able to buy a house with an annual income of $25,000, but it depends on several factors. These include how much debt you have, which loans and assistance programs you qualify for, and home prices in the area where you’re shopping.

Here’s an example of how it could work. Suppose you’re considering a HomeReady loan, which allows a DTI ratio of up to 50%. That means your housing payment plus other debts can’t exceed $1,041 a month. If you have $200 in debt payments a month, that leaves you $841 to spend on housing. If you want to limit your housing expenses to 28% of your income, as experts recommend, you would only have about $583 a month for your mortgage.

Keep in mind that houses are bought and sold at all price points. “Every community in America, there is a home being sold, and there’s going to be someone who purchases. Stay optimistic,” Nutall says.

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