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Everything You Need to Know About Low-Income Home Loans

Want to know about low-income loans and what options you have? There are several programs that can help. Each program has different requirements. There are a wide variety of financing programs available. Find out about some of the best available programs today and if they make sense for you.
Want to know about low-income loans and what options you have? There are several programs that can help. Each program has different requirements. There are a wide variety of financing programs available. Find out about some of the best available programs today and if they make sense for you.

In the current real estate market, affording a home on a low income can seem impossible. With most lenders wanting 20% down payments, it's tough. Finding the right loan program is critical to getting your new home.

There are several low-income home loan programs that you can consider.

Low-Income Home Loan Types

FHA Loans

An FHA loan is worth considering for first-time homebuyers or low-income buyers. You wouldn't need to come up with a 20% down payment with this type of loan.

Down Payment: Down payments as little as 3.5%.

Debt-to-Income: Debt-to-income ratio should be 43% or less. For a borrower with higher debt-to-income ratios, up to 50%, more income or cash reserves may be necessary.

Credit Score: FICO credit score of 500 or higher.

Mortgage Insurance Premiums: Requires mortgage insurance. There is an initial amount of 1.75% of the loan at closing plus annual premiums. Even if equity increases to over 20%, mortgage insurance will continue for the term of the loan.

Max Loan Amount: There is a max loan amount based on area, home location and type of home.

Learn more: The Complete Guide to FHA Loans BY State

VA Loans

If you've been in the military, a VA loan should be the first option you explore. VA loans are available for service members, veterans and surviving spouses. The Veterans Administration guarantees part of each loan. They are not a direct lender.

Minimum Down Payment: There is no minimum down payment.

Debt-to-Income: Accepts a debt-to-income of up to 41%.

Credit Score: The VA does not have a minimum required credit score. Many lenders will look for at least a 580 score, though some want to see at 620 or higher.

Mortgage Insurance Premium: There is no mortgage insurance but the VA does have a "funding fee". The funding fee is a percentage of the loan amount. Your percentage is calculated based on two factors. First, is the type of military service. The other factor is the amount of down payment. The VA also factors into the funding fee if you have used the home loan benefit before or if this is the first time.

Closing Costs: Sellers can pay all or most of your closing costs which makes this an attractive loan if you qualify.

USDA Loans

U.S. Department of Agriculture provides single-family home loans to qualified borrowers.

Interest Rate: 3.75% for low to very low-income borrowers. Loans are available as low as 1% and borrowers have up to 38 years to repay the loan.

Income Requirements: A borrower must have an adjusted income that is at or below the low-income limit in their area.

Eligibility Requirements:

  • No decent, safe or sanitary housing
  • Unable to get financing from other sources
  • Must agree to have the property be your primary residence
  • Be a U.S. citizen or an eligible noncitizen
  • Eligible to participate in federal programs

Other Requirements:

  • Loans are for population areas with less than 35,000.
  • You can't borrow more than the loan limits allow.
  • The home can't have a market value higher than the set loan limits.
  • No in-ground pools allowed.
  • Home must be under 2,000 square feet.

Good Neighbor Next Door

The Good Neighbor Next Door is a loan program offered by the U.S. Department of Housing and Urban Development (HUD). This program offers law enforcement officers, teachers and emergency personnel homes to buy. What makes this program special is that you can buy the homes at a 50% discount.

How It Works: You search on the HUD GNND website and find a home. Once you've found a home, you make an offer. If you selected, you provide documentation showing you are an approved public worker.

A public worker must be one of the following:

  • Law enforcement officers
  • Teachers
  • Emergency personnel

Down Payment: As little as $100 if using FHA financing

Mortgage: HUD creates a second mortgage for 50% of the list price. As long as you live in the home at least 3 years, you will not have to pay off the debt. HUD will erase the debt.

You can find financing from FHA or other types of conventional lenders for the remaining 50%. It makes financing a lot more affordable when it's only 50% of a property's value.

HomeReady Loans

The HomeReady loan program created by Fannie Mae is designed for low to moderate income homebuyers.

Down Payment Requirements: Borrowers must have a down payment of at least 3% to qualify. Unlike some other loan programs, the down payment can come from a variety of sources. Borrowers can pay the down payment with gift funds, grants as well as personal savings.

Mortgage Insurance Premium: All loans have mortgage insurance requirement until there's at least 20% equity in the property.

Credit Score: A borrower must have a FICO credit score that is 620 or higher. These loans have more flexibility compared to other loan programs. Borrowers do not need to have a strong credit history.

Income Requirements: Low-income areas have no income requirements. In all other areas, borrowers may not earn greater than the median income for the area.

Additional Requirements: In each loan, a borrower must complete the mortgage homeownership education course. There is a fee of $75 to take the course. Or, you can enroll in housing counseling with an HUD-approved counseling agency.

Home Possible and Home Possible Advantage Loans

These two programs offer financing for low and moderate-income borrowers. These loans are for borrowers that have limited funds available for a down payment.

Max Loan Amount: Under the Home Possible program, borrowers can finance up to 95% of the cost for their home.

The Home Possible Advantage allows financing of up to 97% for a home or condo. This financing requires you to live in the property.

Credit Score: Credit scores of 660 and up are usually required for both programs.

Mortgage Insurance Premium: Mortgage insurance is required with these loans. Once there is at least 20% equity, you can cancel the mortgage insurance.

Additional Tips for Low-Income Home Buyers

The key to a smooth, successful home purchase is getting the help from people that know how to help you succeed. Finding a great agent can make all the difference!

They can make recommendations based on your personal goals and current finances. What’s more, in 40 qualifying states, Clever Partner Agents offer home buyer rebates. That can put up to 1% of the final closing cost back into your hands. These funds can be applied to your down payment or mortgage balance. You can also use them moving costs or even keep as cash if your lender approves.

Get in touch with Clever today! Learn more about these programs and find out which one is best for you.

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Thomas O'Shaughnessy

Tommy O'Shaughnessy is the Head of Research at Clever Real Estate, the free online service that connects you with top local agents to save on commission. Tommy's team of data scientists create surveys, gather data, and analyze trends in housing, real estate, and personal finance. He directs public relations efforts, acting as a "data communicator" between his team and the press. Clever studies have been featured in Politico, the LA Times, CNBC, Forbes, Yahoo Finance, and other publications.

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