Buying a home when you have a low income can feel challenging – from finding a property within your budget to saving up for a down payment and closing costs.
The good news is that there are home loans for low-income borrowers available, as well as assistance programs that can help with other costs. Such mortgage programs make it easier to qualify for a loan, thanks to their more flexible requirements regarding credit scores and down payments. Find out which mortgage programs could be right for you, plus steps to take as you get ready to buy a home.
- Some mortgage programs – such as the Federal Housing Administration (FHA), Home Possible and HomeReady – offer down payment minimums of 3.5% or less.
- Eligible borrowers could even qualify for a 0% down payment with a U.S. Department of Agriculture (USDA) or Department of Veterans Affairs (VA) home loan.
- Some home buying assistance programs can help with down payments and other costs.
- Bolstering your financial profile in advance can help offset your low income and improve your qualifications on a mortgage application – like paying down your credit card debt or adding a co-signer.
Preparing To Buy A House With Low Income
Follow these five steps to help set you up for success.
Improve Your Credit Score
Your credit score directly affects the interest rate that you qualify for on your mortgage. The better your score, the lower the interest rate you could get – and a lower rate translates into lower monthly payments. As a result, you can either afford a more expensive home or pocket the savings for more room in your overall budget.
Building your credit can take time, but a few simple strategies make the biggest impact:
- Make your debt payments on time each month.
- Ask for higher credit limits on your credit cards – without actually using them for new purchases. The goal is just to increase your available credit.
- Become an authorized user on someone else’s credit card. If the other person’s card has a positive history, it can strengthen your own credit report.
Pay Down Revolving Debt
Paying off revolving debt like credit cards can help your mortgage application in a few different ways. For starters, it can improve your credit score because as your debt balance goes down, you’ll have more available credit.
Less debt also improves your debt-to-income ratio. Lenders use this number – which shows how much of your monthly income goes toward paying debts – to determine how much house you can afford. When you have a low income, reducing your debt as much as possible can help improve your chances of getting approved for a loan.
Create A Budget
There’s a lot to consider when determining your maximum budget for a house. After all, homeownership has expenses beyond the initial purchase price. You also need to account for the cost of homeowners insurance and real estate taxes, both of which can increase over time.
Plus, you should factor in ongoing maintenance and repair costs. In general, experts recommend saving between 1% and 4% of your home’s value each year to put toward maintenance costs. For a $250,000 home, that would range from $2,500 to $10,000 per year. If you’re buying a home that comes with a lower-than-average cost because it hasn’t been updated or is a fixer-upper, keep in mind that it may need extra work, which can end up adding to your budget.
Save For A Down Payment And Closing Costs
Most home buyers need to make a down payment – usually, a minimum of 3% to 5% of the purchase price. On top of that, you’ll need to save for closing costs, which typically total between 3% and 6% of the loan amount.
While there are a few mortgage options that don’t require a down payment, they come with very specific eligibility criteria – more on that later.
Consider Adding A Co-Signer
If you think you could have trouble qualifying for a home loan – whether that’s due to your income or credit score – using a co-signer on the loan could help. A co-signer agrees to be financially responsible for the loan in addition to the primary borrower. Their income and credit score will be considered alongside yours in the loan application.
Keep in mind, though, that such a strategy could put extra pressure on you to make sure you can afford your home. Any late payments or foreclosure would not only hurt you, but also your co-signer, even if they don’t live in the home.
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Home Loans For Low Income Borrowers
As you start shopping for a home, consider these four loan options that are well-suited for borrowers with lower income levels.
FHA Loans
Because an FHA loan is federally insured, lenders are able to offer more flexible credit requirements and a low 3.5% down payment. However, FHA loans charge a mortgage insurance premium (MIP), both as one-time cost at closing and also annually, which is added to your monthly mortgage payment.
Eligibility requirements:
- Minimum credit score: 580 if you make a 3.5% down payment; 500 if you make a 10% down payment
- Maximum loan amount: $541,287 for most parts of the country
- Maximum debt-to-income ratio: 43% – 50%, depending on your creditworthiness
USDA Loans
A USDA loan can help low-income borrowers purchase a home – but only in designated rural areas. One of the biggest benefits of a USDA loan is that there is no down payment required. But such homeowners do need to pay up-front and annual guarantee fees to insure the loan. There are also strict qualifications that both you and the property would need to meet in order to qualify.
Eligibility requirements:
- Minimum credit score: No set minimum, though most lenders require 640.
- Maximum loan amount: Varies by location; most counties are limited to $324,700
- Income limits: Must be under 115% of your area’s median household income
- Property: Must be located within the USDA’s eligibility area
VA Loans
A VA loan is another federally guaranteed mortgage program that comes with a 0% down payment. However, you must meet certain military service requirements in order to qualify. While there is no private mortgage insurance with a VA loan, you do have to pay a funding fee, which ranges from 1.25% – 3.3% of the loan amount.
Eligibility requirements:
- Minimum service requirements: Must meet veteran, service member or surviving spouse requirements
- Maximum loan amount: The lender will determine the size of the loan based on your credit history and debt-to-income (DTI) ratio
- No income limits
HomeReady And Home Possible Mortgages
Fannie Mae HomeReady and Freddie Mac Home Possible loans are designed for home buyers with low to moderate income. The down payment minimum is 3%, helping you qualify with less cash saved upfront.
Eligibility Requirements:
- Minimum credit score: 620 for HomeReady and 660 for Home Possible
- Income limits: Must be under 80% of the area’s median income
- Education: First-time buyers must take homeownership education course
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Home Buying Assistance Programs
Check out these other assistance programs, many run by state housing finance agencies, that can make it more affordable to become a homeowner.
Down Payment Assistance
State and local down payment assistance programs can help cover the cost of putting money down on a home. Exact eligibility requirements vary by organization, but you typically need to be a first-time home buyer and meet certain income requirements.
Down payment assistance may come in the form of grants, forgivable loans, deferred-payment loans, low-interest loans or matched savings programs. It’s important to understand the details of the assistance program, however, including any minimum residency requirements.
Good Neighbor Next Door Program
Good Neighbor Next Door is a Department of Housing and Urban Development (HUD) program that helps eligible buyers purchase homes in revitalization areas at a significant discount. In order to qualify, you must work as a law enforcement officer, teacher, firefighter or emergency medical technician.
HUD will offer a 50% discount on eligible properties, and buyers must live there for at least 36 months. The discount amount is added as a second mortgage until you meet the minimum residency requirements.
Homeownership Voucher Program
The Homeownership Voucher Program helps low income families who are in Section 8 housing transition into homeownership. Participants receive monthly assistance to help cover the costs of owning a home. In order to qualify, you must be a first-time home buyer, meet income requirements, and receive housing counseling.
Mortgage Credit Certificate
A mortgage credit certificate helps low-income homeowners claim a tax credit for some of the interest paid on their home loan. The maximum credit amount is $2,000 per year. Qualifications include being within income limits, being a first-time homebuyer and staying within purchase price restrictions. The program is run by state and local housing authorities.
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Step-By-Step: How To Buy A House With A Low Income
Here’s what to expect when buying a house, even with a low income:
- Narrow down your list of eligible loan programs and assistance options.
- Get preapproved by a lender.
- Set a realistic budget.
- Work with a real estate agent familiar with assistance programs.
- Start house hunting and stick to your price range.
- Make an offer on a property.
- Arrange the inspection and appraisal.
- Finalize financing and respond promptly to any lender documentation requests.
- Close on your new home by paying the closing costs and down payment and then signing your loan agreement.
Take The First Step To Buying A Home
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FAQ
The Bottom Line: You Can Become A Homeowner Even With A Low Income
It’s entirely possible to find home loans for low-income borrowers. Look for the type of mortgage that fits your financial needs and then identify any assistance programs that could lower your costs.
Wondering how far your income will take you on your home buying budget? Check out our home affordability calculator.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
