It’s a myth that you can’t buy a home if you have low income. In fact, there are more programs that help you than turn you down. Knowing the specifics of each program can help you choose the right one. Of course, with any loan, you must be able to afford the payments. This is a given for any program. However, many programs have looser guidelines that make it easier for you to afford a loan.
USDA Loans Allow Low Income
USDA loans are among the best programs because you don’t need a down payment. You can even have your closing costs paid for you. You can receive gift funds or the seller can pay the costs for you. This means you need very little money to get started. What you need is income that doesn’t exceed the USDA guidelines for your area. The income amounts differ based on the average income for the area. You can’t make more than 115% of the average income for your area. This includes all income from household members, though.
You must also find a home in a rural area. Don’t think of cornfields and hour-long rides to the grocery store, though. The USDA has many areas marked as rural that are relatively close to the city lines. It depends on the population in the area and its need for economic stimulation. The boundaries change with every US census.
If you are eligible for a USDA loan, you must meet the following requirements:
- Minimum 640 credit score – This is a mediocre score and not hard for anyone to obtain
- Housing ratio of 29% – Your mortgage payment (principal, interest, taxes, and insurance) can’t exceed 29% of your gross monthly income
- Total debt ratio of 41% – Your total monthly debts including installment loans, credit cards, and the mortgage can’t exceed 41% of your gross monthly income
- You can’t own another home
- You can’t be eligible for any other loan program
- You must have reliable income for the last 24 months
The qualifications for the USDA loan mimic those of many other loans. They do have slightly looser guidelines, though.
VA Loans are Great for Veterans
Another zero down payment option is the VA loan. You must be a veteran of the military or in the reserves to qualify. If you do, you don’t need any money for a down payment. You’ll just need to qualify for the loan, just like any other loan. The VA guidelines include:
- Minimum credit score of 620 – Although some lenders require a slightly higher score
- Decent housing ratio – The VA doesn’t publish a maximum housing ratio, but each lender may have their own requirement
- Total debt ratio of 41% – Just like the USDA loan, your total debts including the mortgage, installment loans, and credit cards shouldn’t exceed 41% of your gross monthly income
- Reliable income for the last 12 – 24 months
- Served at least 90 days during wartime or 181 days during peacetime
- If you were in the Reserves, you must serve at least 6 years before you are eligible
- Meet the residual income requirements for your area – This is money you have left over after you pay your monthly bills
The VA loan offers a great opportunity for veterans to buy a home right after serving in the military. Its loosened guidelines help you secure a mortgage providing you with decent housing.
FHA Loans Another Alternative for Low Income Borrowers
FHA loans are the perfect loan for borrowers who don’t qualify for conventional financing. You do need a down payment, but it’s only 3.5% of the purchase price. You can also receive the down payment funds as a gift from a family member. The FHA has looser guidelines than conventional loans. This is why it’s popular for those with low income. The guidelines are as follows:
- Minimum credit score of 580 – This allows you to put down only 3.5% on the home
- Housing ratio of 31% – As much as 31% of your monthly income can cover your housing payment
- Total debt ratio of 43% – Your total bills can take up as much as 43% of your gross monthly income
- Steady employment/income – Having a 2-year income and employment history helps your case, but even a 12-month history can get you approved
- Bankruptcies must be discharged for 2 years – Lenders start the clock after the date of discharge
- Foreclosures must be at least 3 years ago – You can secure a mortgage just 3 years after losing a home in foreclosure if you bounced back financially
The FHA loan offers peace of mind for those with little income yet can afford a decent home.
Paying Mortgage Insurance
Each of the above programs requires some type of mortgage insurance. You may pay an upfront fee as well as an annual fee. It depends on the chosen program.
- USDA loans – The upfront fee equals 1% of the loan amount. The USDA also charges 0.35% of your loan balance monthly. The insurance company charges the annual insurance based on your average monthly balance for the year.
- VA loans – The VA only requires an upfront funding fee of 2.15%. They don’t charge annual mortgage insurance for veterans, though.
- FHA loans – The upfront fee on FHA loans equals 1.75% of the loan amount. You’ll also pay 0.85% of the average monthly balance for the life of the loan. The amount is divided into 12 equal payments each year.
Any mortgage insurance you pay on the above loans is for the life of the loan. You can’t cancel it if you owe less than 80% of the home’s value. The only way to eliminate it is to refinance the loan.
The above loan programs help low-income borrowers buy a home. As long as the home is decent and livable, there is likely a government-backed program that can help you. Talk to several lenders about your eligibility for each loan program. Each program offers many benefits and the ability to build up equity in a home. You aren’t restricted to a life of renting if you don’t make a lot of money anymore. You just need to shop around and find the program that’s right for you.Click to See the Latest Mortgage Rates»