A Resource Guide for Low Income First-Time Home Buyers

If you’re thinking about buying a home for the first time, the obstacles may seem overwhelming. There are many hurdles to overcome, from trying to save a down payment to working on your credit score or debt-to-income ratio.

These days, the minimum FICO score for a conventional mortgage is 620. FHA loans vary from 580 with a 3.5% down payment to 500 with a 10% down payment.

Debt-to-income ratio is another key measurement when working with lenders. It’s the difference between your monthly debts and your monthly gross income. A debt-to-income ratio of 40% or less of your pre-tax monthly income is considered good by lenders.

For many people, these benchmarks can be very difficult to meet.

Luckily, there are ways to obtain assistance that can make a big difference for aspiring home owners. Government-backed and private programs assist those who qualify as low-income families.

Let’s look at programs you may qualify for to help you overcome mortgage obstacles and move into owning a home.

Low-Income Home Loans

If you qualify as low-income, there are many assistance programs and loan options available to help you move into home ownership. Designed specifically for those of low to moderate income, many of these programs include one or more of the following benefits:

  • Down payment and closing cost assistance
  • Low down payment requirements
  • Mortgage insurance discounts
  • Below-market interest rates and mortgage payments

With most of the programs, you will likely need to complete some home buyer educational training. All programs require you to reside in the home full time. You may not use the home for a rental or vacation home.

Fannie Mae HomeReady Program

Under the 2021 guidelines, you may obtain a mortgage with a 3% down payment. That means if you qualify for a $200,000 home, you need a $6,000 down payment. You may use grants, gifts, or loans to cover your down payment and closing costs.

To qualify for this loan, you may pool the income from all workers in the household. This means income earned by parents, relatives, grandparents, and working children may help you qualify. The basic requirements to obtain a mortgage through HomeReady include:

  • May not earn more than 80% of your census tract’s median income—if your area’s median income is $80,000, then you must make $64,000 or less to qualify.
  • You must complete a 4-6 hour homeownership educational course online
  • Have a FICO score of 620 or more
  • A debt-to-income ratio of 50% or less
  • The home must be your primary residence

Several fixed-rate mortgage options include 10-year fixed-rate, 15-year fixed-rate, 20-year fixed-rate, and 30-year fixed rate. Under this plan, properties you may purchase include traditional single-family homes, co-ops, manufactured homes, multifamily homes, condominiums, and homes in a planned unit development.

USDA Rural Housing Mortgage

This unique program is targeted specifically at low to moderate-income families that want to purchase a home in a rural area. There are two types of USDA mortgages available.

The Guaranteed Program is for those whose household income is below 115% of the area median income. The Direct Program is for those with an income between 50% to 80% of the area median income.

The 100% financing, the no-down-payment program allows applicants to purchase existing homes or build a new home in eligible rural areas. There are no restrictions to first-time buyers.

When applying, you must furnish one year of income history. If self-employed, you must furnish two years of income history. There is no set credit score, but you must be able to demonstrate a willingness to repay debts.

The total mortgage payment, including principal, interest, taxes, insurance, homeowners association dues (if applicable), and rural development annual fee, may not exceed 29% of your gross monthly income.

To qualify, you must agree to use the home as your primary residence. Other criteria include being unable to receive conventional financing with no private mortgage insurance and not being suspended or barred from participating in federal programs. You must be a U.S. citizen, qualified alien, or non-citizen national.

VA Home Loan

The Veterans Administration offers both VA direct and VA backed loans. VA-backed loans require you to meet the lender’s credit and income requirements but do not require a down payment.

To qualify, you must meet the minimum active-duty service days. This varies between 90-181 days, depending on the dates you were active.

Even if you do not meet the minimum number of days in service, you may still qualify depending on the reason for an early discharge. Acceptable reasons include hardship, reduction in force, or medical conditions. You may also qualify if you are a surviving spouse of a veteran or a veteran who is a prisoner of war or missing in action.

VA makes direct loans to borrowers in rural areas with specific service-connected disabilities. The VA may enter into a direct loan option if a veteran is delinquent or defaults on a VA guaranteed loan.

The VA also provides housing assistance through the Specially Adapted Housing Program. This program provides veterans with service-connected disabilities the opportunity to receive VA grants for purchasing or remodeling their existing homes to fit the needs of their disability.

If you have questions about eligibility for a VA loan, call your regional loan center at (877) 827-3702.

Good Neighbor Next Door

This program is directed at law enforcement officers, teachers, emergency medical technicians, and firefighters. The program offers a 50% discount on the list price of homes through HUD. The purchaser must reside on the property for 36 months.

This program has single-family homes available in revitalization areas. The properties being offered are only available to purchase for seven days. To find property available in your area, click on your state, then select the HUD program you are using.

If more than one person submits an offer on a home, the purchaser will be chosen by a random lottery. You will need to sign a second mortgage for the discount amount. There is no interest or payments on the second mortgage as long as you meet the 3-year occupancy requirement.

The eligibility requirements vary depending on law enforcement, a teacher, or an EMT/firefighter.

FHA Loan

FHA loans are mortgages guaranteed by the Federal Housing Administration. The loans include lower down payment requirements and closing costs. The lenient requirements make it easier for people with low incomes or poor credit histories to purchase a home.

You may be able to qualify for an FHA loan with a credit score as low as 580 and a 3.5% down payment. If your FICO score is between 500 to 579, you will need a 10% down payment. Your debt-to-income ratio must be less than 43%

To qualify for FHA, you must have a steady income with proof of employment. Even if you have gone through bankruptcy or foreclosure, you may be able to qualify for one of these loans. FHA may provide information on places you can receive down payment assistance.

Down Payment Assistance

Down payment assistance programs help with the down payment on a mortgage and often help with closing costs when purchasing a home. These are usually in the form of a grant or loan and focus on helping low-income home buyers. Be aware that these programs may require a second mortgage, but those payments may be subsidized, deferred, or forgiven until the mortgaged property is resold.

For instance, the Chenoa Fund allows eligible applicants to receive 3.5% of the purchase price for a down payment. The down payment loan is a zero-interest second mortgage on a 30-year term. The second mortgage is forgiven if the borrower makes 36 consecutive payments on time on the first mortgage.

Most states offer at least one program, while others, such as California, Florida, and Illinois, have several. If you are struggling with saving a down payment, this list of programs may help you overcome that obstacle.

Preparing to Purchase as a Low-Income First-Time Home Buyer

Every family wants a safe, secure home of their own in which to raise their family. By taking a few steps, you can put yourself in the best light with any potential lender.

  • Work on your credit score by making payments on time, paying down your debt, and keeping your debt-to-income ratio down
  • Develop a budget that gives you insight on how much you can afford to spend on a mortgage each month, keeping in mind the potential for maintenance and repair costs you do not have when renting
  • Save money to use for a down payment and closing costs
  • Apply for low-income first-time homebuyer programs

You may be able to find a family member or friend who is willing to co-sign on a mortgage for you. The cosigner’s credit information and financial standing are taken into consideration when determining your mortgage eligibility. The cosigner is responsible for the mortgage if you are unable to make your payments.

Qualifying for Low-Income Mortgages

Qualifying for a mortgage on a low income can be difficult but it’s not impossible. Don’t forget that owning a home is a big responsibility and it may not be right for everyone, so be sure to consider your options carefully before making any big decisions. When you’re ready, you can research and apply for different kinds of local and national assistance programs that can help make your dream a reality.

Save Money on Your Wireless Phone Service

If you qualify for federal benefit programs such as SNAP, you also qualify for Lifeline service. Lifeline is a federal benefit program that makes it possible for low-income consumers to receive access to free or heavily discounted communication services. Click here to find out more and apply for this valuable benefit.