The lack of affordable housing across the United States is pushing the dream of homeownership further and further out of reach for many Americans. However, the right information can bring the dream closer to reality than many aspiring homeowners realize.
In this article, we’ll provide some blueprints for how low-income buyers can utilize available tools and resources to purchase homes.
Can You Buy a House With Low Income?
While purchasing a home with a lower income comes with challenges, it is still possible. The situation can feel discouraging, but state and federal government programs designed to aid low-income families in the search for housing are offering glimmers of hope. Governments are continuously reforming policies and regulations to try to bring down barriers to home ownership.
5 Tips for Buying a Home With a Low Income
Like all homeowners, those in lower income brackets thinking of purchasing a home need to do some preparation related to their finances.
1. Improve Your Credit Score
Lenders view credit scores as a measure of borrowers’ trustworthiness. While 800 is considered an exceptional credit score, you should have a score of at least 620 when applying for a conventional mortgage. Someone applying for an FHA (Federal Housing Administration) loan needs a score of 580 or higher.
If your score isn’t where it needs to be, making an effort to boost it can increase your chances of being approved for a mortgage. The first step is making sure you aren’t falling into some bad habits. Things that can harm your credit score include:
- Making late payments
- Suddenly closing a credit account
- Applying for multiple lines of credit at once
You need to stay up to date with all payments while you’re in credit-boosting mode. Prioritize getting ahead of any past-due accounts. Finally, avoid applying for any new lines of credit if you’re thinking of applying for a mortgage. Don’t forget to check out your credit report to see if any errors reported by creditors could be harming your score.
2. Lower Your DTI Ratio
Do you know your current DTI? DTI refers to debt-to-income ratio. You can figure out your DTI by dividing your monthly debt payments by your gross monthly income. Debts can include credit card balances, car loans, student loans, personal loans, loans taken out for an investment property, child support and alimony obligations, and more.
Lenders weigh DTI heavily when deciding to either reject or approve loan applications. Your DTI can also determine the loan amount you’ll be approved for by a lender.
Lenders generally want to see a DTI ratio of 43% or less. However, they might reserve the best loan terms for borrowers with DTIs below 36%.
If you’re trying to qualify for a low-income program to obtain a mortgage, debt could make it harder to get approved. The fastest way to improve your DTI is to increase your income. Paying down debts is another option.
3. Save for a Down Payment
While saving for a large down payment isn’t a viable option for all low-income home buyers, it can be beneficial to begin setting aside small amounts of money over time. If you qualify for a loan with a low-down payment option, you may be able to put down as little as 3.5%.
4. Use a Co-Signer
One way to buy a home when your own income and financial standing make qualifying for a mortgage impossible is to use a co-signer. Here are some fast facts on co-signers to know about from the Consumer Financial Protection Bureau (CFPB):
- A co-signer is usually a family member
- Along with the borrower, a co-signer takes full responsibility for paying back a loan
- A co-signer is obligated to make any missed payments if the borrower doesn’t pay
- A co-signer is also obligated to pay the full amount of the loan if the borrower doesn’t pay
- The co-signer’s credit can be harmed if the borrower makes late payments
The reason banks will accept low-income buyers with co-signers is that a co-signer’s good financial standing is being used to secure the mortgage. This gives a lender confidence that the loan will be repaid.
5. Use Gifted Funds
Not everyone has a family member or loved one ready to contribute a sizable gift to help with a down payment and closing costs. However, low-income buyers with this resource should take advantage of the fact that down payments gifted to them can help them to get approved for a mortgage.
When you use gifted funds for a down payment, be prepared to provide a gift letter proving that the funds are not part of a loan that is expected to be repaid. If you’re applying for a loan from the FHA, the source of gifts must be a family member, employer, labor union, or charitable organization. Cousins, nieces and nephews cannot provide gift money for down payments.
Home Loan Options and Mortgage Assistance Programs
Mortgage assistance is available at both the state and federal levels for low-income buyers. Take a look at some of the resources below if you’re ready to pursue owning a home.
An FHA loan is a federally backed loan offered through the FHA. The insurance built into the FHA program makes it possible for people with low incomes or lower credit scores to obtain mortgages. Here are some fast facts on FHA loans:
- They have lower income requirements compared to conventional loans
- Borrowers can qualify with a credit score of 580
- The down payment can be as low as 3.5%
- There is no set income level for approval
- You must prove that you have steady employment
- The borrower must pay all closing costs and final fees to close
USDA loans are specialty loans offered through the USDA (U.S. Department of Agriculture) Rural Development Guaranteed Housing Loan Program. In order to qualify for this loan, you must purchase a property designated as rural by the United States Department of Agriculture. Applicants may be eligible to buy, build, rehabilitate, improve, or relocate a dwelling with 100% financing. That can mean no money down to purchase a home for those who qualify.
In order to qualify for a USDA loan, your income cannot exceed 115% of the median household income in your area. You can use the USDA’s loan calculator to enter your specific state and county here. You must also be a U.S. citizen, U.S. non-citizen national, or qualified alien who is agreeing to personally occupy the home as your primary residence.
The VA home loan program offered through the U.S. Department of Veterans Affairs helps
service members, veterans, and eligible surviving spouses to become homeowners. While VA loans are provided through private lenders, borrowers enjoy more favorable terms compared to conventional borrowers. This is what you need to know:
- In general, no down payment is required — just keep in mind that specifics on down payments can vary by lender
- VA loans have competitively low interest rates and limited closing costs
- There is no need to take out private mortgage insurance (PMI)
Don’t worry about exhausting these benefits on a first home. The VA home loan is a lifetime benefit you can take advantage of multiple times. If you believe you’re eligible for this mortgage, the VA Buyers Guide covers all the specifics.
HomeReady and Home Possible Mortgages
Many first-time buyers are unaware of the HomeReady and Home Possible programs offered through Fannie Mae and Freddie Mac. While both allow buyers to make smaller down payments, the two programs have slightly different requirements.
The biggest difference between HomeReady and Home Possible is the credit score requirement. While HomeReady requires a credit score of 620, borrowers will need to get in shape with a minimum 660 score to qualify for Home Possible.
Fannie Mae’s HomeReady at a glance:
- Available to first-time and repeat buyers with credit scores of at least 620
- Just 3% is required for the down payment
- Down payments can be composed entirely of gifts or grants
- Income requirements are flexible
- Projected income from roommates or boarders can be used to qualify
- A co-signer’s income can be used to qualify
- Your income cannot exceed more than 80% of the median income in your area
Freddie Mac’s Home Possible at a glance:
- Available to both first-time and repeat buyers with a minimum credit score of 660
- Alternate credit data can be used for borrowers with nonexistent credit
- The minimum down payment required is 5%
- Down payment funds can come from a gift or grant
- Your income cannot exceed more than 80% of the median income in your area
- Projected income from roommates can be used to qualify
Homeownership Voucher Program
The Housing Choice Voucher (HCV) homeownership program allows families that receive assistance under the HCV program to use their Section 8 vouchers to purchase a home. It’s important to know that not every Public Housing Agency (PHA) participates in this program. However, eligible families in jurisdictions that do participate need to meet specific employment and income requirements. However, the employment requirement is waived for elderly or disabled applicants.
The Homeownership Voucher Program is only available to first-time buyers.
Down Payment Assistance (DPA)
Funded by government agencies, private enterprises, and charitable organizations, down payment assistance is available to buyers at a variety of income levels. It comes in the form of cash grants, low-rate loans, or tax incentives. DPA might offer:
- A cash grant to be used toward a down payment
- Cash that can be used for mortgage discount points
- Mortgage loans offered with subsidized interest rates
- Forgivable loans that can be used for down payments
- State and local tax credits for buyers
With thousands of down payment assistance programs available across the country, it’s hard to pin down requirements. However, the majority are only open to first-time buyers. While HUD provides a list detailing some DPA resources, anyone who thinks they might qualify should also contact the housing authorities in their city and state for more information.
State-Specific First-Time Homebuyer Programs
As mentioned above, many state and local governments offer government-backed programs that assist first-time buyers. Reach out to your state’s housing or housing finance authority to obtain a list of programs that may be open to you based on your income. Just know that income thresholds and other qualifying factors vary by state and zip code.
How the Government Is Currently Reforming Affordable Housing
The housing shortage affecting low-income and moderate-income Americans hasn’t gone unnoticed by the federal government. Several efforts have been put into motion recently to help ease the housing crisis. President Biden’s recent effort to lower housing costs and expand access to affordable rent and home ownership includes:
- Investing in building and preserving millions of affordable homes
- Making a long-term commitment to opening up housing accessibility and affordability for veterans and youth aging out of foster care
- Investing in first-time, first-generation homebuyers who have been locked out of the wealth-building benefits of homeownership by providing down payment assistance
- Expanding the Low-Income Housing Tax Credit (LIHTC) as an incentive for developers and investors to create more affordable housing options
- Reducing barriers to the development of affordable housing
- Increasing the supply of affordable housing financed by existing HUD (U.S. Department of Housing and Urban Development) programs
- Expanding the HCV program
- Increasing HUD funding for homeownership
- Promoting homeownership in rural America
One of the more interesting approaches to expanding homeownership for Americans is the reallocation of funds using the State and Local Fiscal Recovery Funds (SLFRF) program (which was authorized by the American Rescue Plan for COVID-19 recovery) as a way to boost investment in affordable housing. While SLFRF already delivers $350 billion to state, territorial, local, and Tribal governments across the country, new rules would provide more flexibility for the program. The U.S. Treasury reports that SLFRF recipients have already committed over $5.4 billion for affordable housing development and preservation as part of a larger commitment to devote $16 billion to housing-based services that include mortgage assistance.
The Bottom Line
It’s possible — that’s the big takeaway from learning about all the government-backed and private options for obtaining a home loan. These options make it possible to obtain safe, secure housing with wealth-building potential. For most people with lower incomes, the FHA loan will be the best place to start unless you are confident that you meet some of the special qualifications for assistance programs.
While programs and resources are out there, buyers need to be ready to advocate for their rights. Many programs aren’t widely advertised. This is especially true of state and local down payment and mortgage programs. With so many regulations, funding avenues, and loan options being introduced to help ease the housing shortage, even a buyer who was told “no” just a few years ago may now have an open channel for purchasing a home of their own.