Buying a home takes a fully-stocked toolbox – just as it would take to build a home. Here are a few of the best low-income mortgage loan options.

USDA Home Loan: No money down loan option

USDA loans let people buy homes without putting a cent down on the house and are available for people looking to purchase property in USDA-designated rural areas. See the USDA’s property eligibility map to review eligible areas. Another name for this loan is the Rural Development Loan, or the USDA Guaranteed Loan program. It has served as a great home loan option for low-income families over the decades as you can purchase property with very little or nothing down and at a low-interest rate.

USDA loans are meant for:

●      People who don’t own an adequate home already.

●      People making 115% or less of the area’s median income.

USDA Low Income Loan (USDA Direct Loan)

These loans, also known as Section 502 loans, are meant for low-income families and are available to those with low and very low incomes which are defined as 50% to 80% of the median income of the area. You’ll have to apply directly through the USDA as standard lenders don’t offer this loan option. You must have too low of income to qualify for other loans to be eligible.

FHA Loan: A Great Home Loan Option for People with Lower Incomes

You’ve likely heard of FHA loans, which are another government-backed type of loan that assists people with lower incomes buy a house. Here are some benefits on FHA loans:

●      Minimum 3.5% down payment, which can be gifted to you

●      People with lower credit scores are eligible compared to standard mortgages

●      It’s possible the seller can pay most or all closing costs

●      The debt-to-income ratio requirements are more flexible compared to standard mortgages, which makes it easier to qualify with a low income.

●      You don’t need more money in the bank after you close on the loan.

●      You can have a cosigner, who can be a non-occupant who helps repay the loan.

FHA 203k: Buy and Fix Up a House with Only One Loan

This type of loan, one of the best on the market because you can take advantage of lower priced homes, is an FHA loan with the added ability to finance both the purchase price of the home and the renovation costs. With other loans, the lender typically ensures the property meets minimum living and safety standards, but this isn’t the case with an FHA 203K loan. You finance the repairs needed for the home to meet those standards and you get to take advantage of steep discounts on poorly kept houses.

VA Loans: The Cheapest Monthly Home Loan Payments

If you are a veteran or an active military member, this might be the loan for you. Perks include zero down payment, no monthly mortgage insurance (which can save you a lot of money per month), and the seller is able to pay most or all of your closing costs. VA loans are also more flexible on debt-to-income ratio and okay with lower credit scores.

To qualify, you must have US military service experience that includes:

●      If currently an active duty member, 90+ days in wartime or 181+ days in peacetime

●      If a veteran, you must have served either 24 months, the full period you were ordered to serve, or six years if service was in the Reserves or National Guard

HomeReady 3% Down Mortgage

The HomeReady program by Fannie Mae is a great option for those needing flexibility on sources of income. These loans allow for many nontraditional sources of income that include:

●      Household members that won’t be on the loan

●      Income of a boarder or roommate

●      Basement apartment rental income

●      Non-occupant co-borrower income

There is also just a 3% down payment needed which can either be a gift or from an approved down payment assistance program.

Good Neighbor Next Door (GNND) – Houses Discounted by 50% and Only $100 Down Payment Needed

Offered by HUD, or the US Department of Housing and Urban Development, this special loan that allows you to purchase a home at 50% the purchase price is meant for approved public workers such as law enforcement members, teachers, and emergency personnel. First, go to HUD’s GNND website, find a home, and make an offer. There is a random lottery to see who's offer is accepted. If you’re approved, all you do is provide proof of your public service. HUD then establishes a “silent second” loan for half of the purchase price, but if you live in the home more than three years, the debt is entirely erased. There are various ways to finance this loan but FHA loans allow your down payment to only be $100.

Manufactured Housing, or Mobile Home, Loans

Manufactured homes, or mobile homes, are widely available in many areas, resulting in low prices. This fact makes them a great option for those looking to buy a home for less. Though they don’t appreciate as much as standard homes, they are a fantastic option to get into a house. The only caveat is that they must be built after June 15, 1976. Loans won’t cover any mobile home build before then. An FHA loan is likely the easiest route to finance purchasing a manufactured house.

HUD’s HOME Investment Partnership Program

Each year, HUD distributes funds throughout the 50 states to help people with low-income purchase homes. To qualify you cannot make more than 80% of your area’s median income. These down payment assistance funds, also known as DPA, can be combined with standard loan options. For further information contact a loan officer to discuss financing your home purchase with both a loan and DPA.

Down Payment Assistance from Cities, States, and Counties

There are endless down payment assistance, also known as DPA, options offered by states, counties, and even cities. The goal of DPA funds is to help low-income home buyers and therefore revitalize targeted areas. This can be a lifesaver when it’s hard enough as it is to save to everyday life. Do a quick google search about this in your area to find your options. There are differences with each program. Some don’t require repayment, whereas other loans do, although there will likely be either no interest or only a small amount.

Charitable Organizations

There are a few HUD-approved non-profit organizations that can contribute to DPA funds toward

Grants for Low-Income Families to Buy a House

There are plenty of grant programs aimed to help low-income families purchase a home on the state, county, and city level. With rising housing costs, local governments have a vested interest to help people get in homes by assisting with down payments and closing costs. Although there isn’t a centralized database to research these programs, they might be just a quick Google search away. Enter your city, state, and/or county along with “housing grant” into the search bar and see what comes up.

More Thoughts On Low-Income Home Loan Options

About 15%-18% of the country’s economy is made up of homeownership, per research conducted by the National Association of Home Builders. That is a large portion of the economy, and because of this fact, the government has a vested interest in more people purchasing homes.Therefore, it sponsors many loan options to try to encourage average and below average earners to pursue homeownership. Many people don’t even think about buying a home because of their low-income, but the reality is with the myriad of loan options available, home ownership might be within reach to many.

Seller-Paid Closing Costs Help With Your Low-Income Mortgage

Closing costs, which can sometimes be thousands of dollars, can often be forgotten about but quickly add up to make your dream home unaffordable. One option that may be available to you is to have the home’s seller cover the closing costs. If they want to sell the home just as you’d like to buy it, they might be amenable. Sellers also want to ensure a smooth process so if they have to pay a little more, so be it.  The realtor will be able to assist and negotiate this on your behalf. If the house is in a highly competitive market and there are multiple offers, this option will likely be unavailable to you. So look for homes less in demand, that need repairs, or in markets with a lot of foreclosures.

Insight into Lender’s Decisions on Whether You’re Approved

Now that we’ve discussed loan options for people with low-income, let’s talk through the basics of mortgages and what factors into you being approved for one.

Credit

Even if you are low-income, if you have a good credit score, you’ll be in good shape to be approved for a home loan. A mortgage is the biggest credit line you can be approved for, so if you have a good history of repaying your smaller loans, a lender will see you as a less risky candidate for a loan. Credit score can significantly impact the loan amount you are eligible for. If your credit score isn’t great, it might be worthwhile to work on improving it before pursuing homeownership, especially as a low-income borrower where the rest of your application needs to be in great shape to be approved.

Employment

Even if your income from your job is low, having a steady employment history speaks volumes on a loan application. You come off as more reliable if you’ve had one job for 2 or more years as opposed to 6 jobs in the same timeframe. Since the lender is relying on you to make your loan payments, they want to see you are consistently employed over a long period of time. If there is a gap of employment or you have had multiple jobs in a short timeframe, you can write a letter of explanation that paints a better picture of your situation.

Debt vs. Income

Debt-to-income ratio weighs the amount of debt you have each month by the amount of income you bring in. This is a very important factor in a loan application as it tells the loan officer if you’re able to take on more debt at this time. If the ratio says that you’ll be using more than 45% of your income on housing costs, it doesn’t look good.

Down Payment

It is hard to save money, especially if your budget is tight. There are loan options available that require little to no down payment. Even so, the lender will still want to see that you’re able to put money away in savings, even if it’s only a small amount each month.

Property

The lender will ensure the property you intend to purchase meets minimum living and safety requirements. The exception is if you are purchasing a fixer-upper. There are loan options available that finance needed repairs.

Get Pre-Approved For A Loan Before House Searching

Pre-approval is always a good idea because it lets you know your maximum purchase price. It’s good for low-income home searchers because they can move into the home search process with the confidence of knowing there’s a loan option available to them.

Final Words About Low-Income Home Loans

There are a lot of options out there for aspiring low-income homeowners. Do your research, keep at it, and you're bound to find your dream home in no time.