Homeownership may feel like an integral part of the American Dream, but for many, it’s out of reach. If you have a low income, crushing student loan debt or both, you may even feel like you’ll never be able to purchase a property — at least not one you want.
Fortunately, there are plenty of home loan programs geared toward low-income borrowers, including ones that don’t require a big down payment — or any down payment at all.
If you wish you could own your own home but feel like buying is out of reach, it’s crucial to research programs and home loans that could help. This guide goes over some of the best low-income loans available, with details on how they work, who is eligible and their pros and cons.
Home loans for low-income borrowers
If you’re ready to become a homeowner, but you’re seeking outside help, here are some of the home loan programs you should study and consider:
Federal Housing Administration, or FHA loans, offered through the U.S. Department of Housing and Urban Development (HUD), have been helping consumers become homeowners since 1934. An FHA home loan promises low closing costs, easy credit qualification and a down payment that could be as low as 3.5% of the purchase price of the home.
Generally speaking, you may be able to qualify for an FHA loan with 3.5% down and a credit score as low as 580. If your credit score is between 500 and 579, you will likely be required to put down 10% of the home’s purchase price. FHA loans may also accept a debt-to-income (DTI) ratio of up to 43%, which means your liabilities and debt payments make up a maximum of 43% of your income each month.
FHA loan benefits:
- These loans have easy credit requirements. FHA home loans offer easy credit qualification compared with conventional home loans.
- You don’t have to save up for a substantial down payment. You may be able to use an FHA loan with a down payment amount as low as 3.5% of the purchase price.
- Your DTI ratio could be flexible. You may qualify with a DTI ratio as high as 43%. This detail can make a big difference for buyers with a low income and considerable debts.
FHA loan drawbacks:
- You have to pay upfront mortgage insurance and annual mortgage insurance premiums. FHA home loans require an upfront mortgage insurance premium as well as annual premiums. The upfront portion equals 1.75% of the mortgage amount, and the annual insurance premiums work out to 0.85% of the loan’s value each year.
- Mortgage limits vary by county and state. FHA loans come with strict mortgage limits that vary depending on where you live. These limits can be lower than those for conventional loans, and you can search loan limits in your area here.
- Your prospective home must pass an FHA inspection, and not all homes qualify. The FHA lists minimum HUD property standards that must be met for a property to qualify. While these standards aren’t out of the ordinary, they do require homes to be in a safe and habitable condition. Homes must also pass an inspection by an FHA loan inspector, who will confirm the home is suitable and safe for the buyer.
HomeReady® is a mortgage program offered through Fannie Mae. It aims to help borrowers with a low to moderate income and small down payment ready transition into homeownership, but it also works for current homeowners who are considering refinancing their mortgages to get a better deal.
The HomeReady loan program is available to consumers with credit scores of 620 or higher, although those with scores of 680 or higher may qualify for a loan with even better terms.
HomeReady loan benefits:
- Buy with a low down payment. HomeReady loans require a minimum down payment of only 3% of the purchase price, which is less than FHA loans.
- You can cancel your mortgage insurance. You can cancel your mortgage insurance payments once you reach 20% equity in your property.
- You can use gifts toward your down payment. When you use this type of loan for a single-family home, you can use gifts toward your down payment. Borrowers aren’t required to use any of their own funds toward the down payment on their home.
HomeReady loan drawbacks:
- HomeReady loans come with income limits if you buy outside of low-income areas. These income limits apply unless you’re buying a home in an area deemed low-income.
- You are required to complete a homeowner education course. To qualify for this type of loan, you are required to take a homeowner education course online.
- Interest rates may be higher than other programs. While these loans are easy to qualify for, interest rates may be higher than those you’ll get with the FHA loan program.
Home Possible Loans
Offered through Freddie Mac, the Home Possible® loan program lets consumers purchase a home with a low down-payment requirement. Borrowers can use these loans for homes with one to four units, and they are offered with fixed as well as adjustable rates. Consumers can even qualify for these loans without a credit score.
Home Possible loan benefits:
- You can use gifts toward your down payment. You can use funds from family members or employer programs, sweat equity or even “gifts” toward the down payment on your home.
- You don’t even need a credit score to qualify. This mortgage is available to consumers who don’t even have a credit score, provided they meet eligibility requirements.
- You can cancel your mortgage insurance. Easily cancel your mortgage insurance once you reach 20% equity in your property.
Home Possible loan drawbacks:
- Income limits apply, unless you’re buying in a designated low-income area. Like HomeReady loans, Home Possible loans set income limits that vary around the country.
- Interest rates may be higher than FHA. Interest rates may be higher with these loans than other options, including FHA loans.
- You’ll have to take a homeowner education course to qualify. You are required to undergo housing counseling and education before you can use this home loan program.
U.S. Department of Veterans Affairs (VA) loans offer excellent value for homebuyers who are active duty military, eligible veterans or an eligible surviving spouse. These loans make it possible to purchase a home without any money down or the need to pay private mortgage insurance (PMI).
Benefits of VA loans:
- You can buy with no down payment. One of the biggest advantages of VA loans is that you can often buy with no money down. It’s a boon to buyers who have low incomes and minimal funds.
- You don’t have to pay ongoing PMI premiums. These loans come without PMI altogether, which will help lower your monthly housing payment.
- Get a competitive interest rate and lower closing costs. VA home loans come with a competitive interest rate and lower closing costs than you’ll find with a conventional home loan.
- There are no loan limits. The VA doesn’t set limits on how much you can borrow, although they do place limits on how much of their loans they will guarantee.
Drawbacks of VA loans:
- You do have to pay an upfront funding fee. While VA loans do not charge PMI, they do require an upfront funding fee that varies depending on your level of military service.
- You have to be a qualified veteran, active servicemember or qualifying spouse to use this loan. Because VA loans are intended for active duty military, veterans and eligible surviving spouses, they won’t work for everyone.
- VA lenders may enact their own requirements. While the VA sets the terms for loans through their program, some lenders may list their own requirements, known as “lender overlays.” These requirements may include a minimum credit score, maximum debt-to-income (DTI) ratio, minimum loan amount and more.
The U.S. Department of Agriculture (USDA) offers home loan programs to rural Americans seeking assistance. These programs are geared to low- and moderate-income borrowers who plan to purchase a home in an area deemed “rural” by the federal government. When it comes to loans for single-family homes, there are two main programs — the Single Family Housing Direct program, and USDA guaranteed loans.
Benefits of USDA loans:
- You may qualify for payment assistance. USDA Direct loans can come with payment assistance, if you qualify. Payment assistance is a subsidy that reduces your mortgage payment for a limited time.
- Get a fixed-rate loan with a competitive interest rate. Interest rates in their direct loan program are fixed and can be as low as 1% when factoring in payment assistance.
- There is no down-payment requirement. The Direct loan program also comes with no requirement for a down payment, making it a solid option for families with limited funds. USDA guaranteed loans also have no down payment requirement.
Drawbacks of USDA loans:
- You must purchase a home in a designated “rural” area. The USDA limits the use of their loans to areas they deem rural, which typically includes an area with fewer than 35,000 inhabitants.
- These loans come with particular terms. USDA Direct loans can be repaid over 33 or 38 years, whereas guaranteed loans are repaid over 30 years. These terms are not flexible. Also, note that houses must meet specific terms for these programs. For example, homes purchased with the direct loan program must be under 2,000 square feet, cannot have an in-ground swimming pool and cannot be designed for income-producing activities.
- Income limits apply. To qualify for a USDA home loan, you must have a low or moderate income. The USDA defines “very low income” as 50% of the area median income and “low income” as any income between 50% and 80% of the area median income. A moderate income, on the other hand, is income below 115% of the area median income. As such, these income limits vary around the country.
Tips for buying a home with a low income
As you continue looking for a way to ease into homeownership with a low income, keep in mind that the steps you take now could help you later on. The following advice can make it easier to qualify for some home loan programs once you’re ready to buy:
- Pay down debt. Some of the housing programs available to first-time and low-income homebuyers enact a maximum DTI ratio. While you may not be able to control the income side of the equation, you can lower your DTI by paying off some of your debts. Paying off high-interest debt like credit card balances can also help you save money on interest, which you could squirrel away as cash for your eventual home purchase.
- Take steps to improve your credit score. Because many home loan programs have minimum credit score requirements, trying to improve your credit score now can only help you in the long run. The best steps you can take to boost your score include paying all your bills early or on time, paying down debts and refraining from opening or closing too many accounts.
- Seek down payment assistance. Keep in mind that you may qualify for down payment assistance in some cases. Programs and their requirements vary, so make sure to check for both local and national programs.
- Speak with a housing counselor. HUD can connect you with a housing counselor who offers free or low-cost advice. The agency also provides a tool that makes it easy to search for housing counselors in your area.
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