Buying a Home with Low Income

Owning a home is a goal for many people, and for good reason. Monthly mortgage payments can be lower than rent payments. Homeownership represents stability and independence. And perhaps most importantly, owning a home builds generational wealth.

But for many, there are some real barriers to homeownership.

Barriers like low income, limited funds in savings for a down payment, high debt-to-income ratios, a lack of credit history, or poor credit. If any (or all) of these describe your situation, you may think homeownership isn’t in the cards.

Well, let’s check those cards again.

With programs for first-time home buyers, programs that allow for low or even no down payments, down payment assistance programs, refinancing options, and personalized guidance from an experienced home lender, you may be closer to homeownership than you thought.

Programs for First-Time Home Buyers

If you have already owned your own home at some point in the past, don’t skip over this section too quickly. Get this – it doesn’t have to be the first home you’ve owned to qualify for many first-time home buyer programs. If you have not owned a home within the last three years, some programs will consider you a first-time home buyer.

Now that that’s out of the way, let’s get down to it. First-time home buyer programs are designed to help get you in a home – and there are lots of programs out there.

  • Fannie Mae. Through Fannie Mae’s first-time home buyer program, you can put as little as 3% down if your credit is in good standing, the home will be your primary residence, and it is a single-unit property.
  • Freddie Mac HomeOneSM. This program for first-time home buyers requires just 3% down and has no geographic or income limits, but homebuyer education is required if all borrowers are first-time homebuyers.
  • Fannie Mae’s HomePath Ready Buyer Program. This program provides three percent in closing cost assistance to first time homebuyers, but there are some qualifications. Buyers must complete an educational course and purchase a Fannie Mae foreclosed property.
  • State-specific programs. Many first-time home buyer programs are specific to the state, so check to see what your state offers.

Programs with Low or No Down Payments

One of the biggest challenges to buying a home? Coming up with a down payment. A traditional mortgage typically requires a 20% down payment. That’s $24,000 on a $120,000 home – an amount that seems insurmountable to many who are struggling to make ends meet, let alone set money aside.

That’s why low and no down payment programs are so important. Let’s look at a few:

  • Fannie Mae HomeReady Mortgage. This program offers a low down-payment and competitive pricing for those with low income and a credit score above 620. This income-driven program is available to borrowers who make 80% or less of the median income in their area.
  • Freddie Mac Home Possible®. Like the Fannie Mae program, this program is for those who make 80% or less of the median income in their area, offers as little as 3% down, and is competitively priced.
  • USDA Single Family Housing Guaranteed Loan Program. Designed to provide low- and moderate-income households with the opportunity for homeownership, this program offers up to 100% financing (that means 0% down!) on eligible homes in rural areas. Borrowers’ must have income that does not exceed 115% of the area’s median household income and must agree to live in the home as their primary residence.
  • FHA. Loans from the Federal Housing Authority require as little as 3.5% down for those with a credit score of 580 or higher, or 10% for those with a score of 500 to 579. However, note that while FHA loans may allow credit scores as low as 500, many lenders will not accept those lower scores. Here at IncredibleBank, we accept scores as low as 640 on FHA loans.
  • VA. Veterans Affairs offer mortgages with no down payment loans for military members, veterans, and their families. These loans have a feature called entitlements, which is basically the amount the VA will guarantee to the lender should you default on your loan and is often the basis lenders use to determine what size loan you qualify for.

One important thing to note regarding low and no down-payment mortgages – if you put less than 20% down on your home loan, you will likely be required to pay private mortgage insurance, often referred to as PMI. This insurance protects your lender in case you default on the loan.

While it sounds like a bummer, without PMI, many of these programs may not be available because the loans would be deemed too risky. And the good news is, PMI payments can be dropped once you have enough equity in your home from the payments you make.

Refinancing with Low Income

Do you already own your home? Congratulations! But you may think your income is too low (or your loan-to-value ratio is too high) to refinance.

Guess what?

You’ve got options too! Here are a few:

  • Fannie Mae RefiNow. Have an existing Fannie Mae loan? If you earn 80% or less of the median income in your area, you may be eligible to refinance to a lower rate to reduce your monthly mortgage payment.
  • Freddie Mac Refi PossibleSM. This program is for borrowers with a current Freddie Mac loan and make 80% or less of the median income in their area.

Down Payment Assistance

In addition to programs that allow for you to put less money down, there are also programs that help provide you with funds for your down payment via grants or low-interest loans. As with many other programs, these vary by location, so look at what’s available in your state and to see if you qualify.

Buying a Home with No Credit History

If you haven’t had any type of loan, such as an auto loan, student loan, credit card, or mortgage, you may not have a credit score. In those cases, you’ll want to first make sure your lender is willing and able to assess your ability to repay your loan using nontraditional means.

(Guess what? IncredibleBank is one of those lenders!)

For example, if you have a good history of repaying your rent, utilities, insurance, and other payments, your lender can take that into consideration in lieu of a credit score. Government-backed loans such as FHA, USDA, and VA loans allow lenders to use these nontraditional methods of determining creditworthiness.

The best way to make sure this remains an option is to make your payments on time (lenders will likely want to see 12 months of timely payments toward more than one type of obligation) and to keep records of your payment history – receipts, check stubs, and other documentation showing your payments.

Personalized Guidance from an Experienced Lender

Phew! That’s a lot to take in. But don’t get overwhelmed – you don’t have to sort through each program yourself and try to figure out which one will be the best for your specific circumstance. That’s what your IncredibleBank lender is for.

Our home lenders have extensive experience with a variety of loans, situations, programs, and more. Your lender will work with you to understand your unique situation and goals to determine the right option(s) for you. Even if now isn’t the right time for you to buy, your lender can provide you with guidance to put you in a better position when you’re ready to make the move.

Contact one of our lenders to learn more, even if you’re just in the “thinking about it” stage. Learn your options and your next best steps toward your goal of homeownership.