Homebuyers Guide For Low Income Families
The dream of owning a home shouldn't only be for people with ideal financial circumstances. If you have a low income, options exist to help you find an affordable home and manageable loan. Careful forethought and the right moves can position you to make homeownership a reality.
Improve Your Finances Now
A lender decides your loan rates and terms by credit score, down payment, and work history. Monitor your credit report with free financial services that provide regular updates. Your credit score is a mix of these factors, listed from most impactful to least:
Your payment history
Credit card usage
Average age of your open accounts
Hard inquiries
Credit mix
If you find an error on your report, fix the error by contacting the credit bureaus and the company that provided the incorrect information.
Improve your score and maintain it by keeping older credit cards open and paying down unsecured debt. Lower your debt-to-income ratio. Your minimum credit card payment, child support, alimony, and other liabilities should total less than 43% of your monthly income before taxes.
Steady employment also encourages loan officers. Lenders generally recommend two years in a job or industry, but many banks are flexible, especially for contractors and self-employed individuals.
Begin setting cash aside for a down payment and closing costs. While you may find some assistance for these expenses, preparation is key. Closing costs can range from 2% to 5% of the purchase price.
A higher down payment helps you secure better terms and rates. Cash gifts from family and friends can help. Each loan and program varies in who may give this gift and the amount. The giver must provide a letter stating the use of the money and his or her relationship with you.
Pre-qualification is an excellent tool to see how much of a home you can buy. You provide your income, credit, and other details to a lender to estimate possible loans you may qualify for. The data helps you see where you can improve your finances for better terms and rates.
Locate Affordable Housing
If you are handy, consider a fixer-upper. Always have a professional inspect the property to understand the whole picture, and expect that renovation costs will be 15% more than your original estimates.
You may qualify for an FHA 203(k) rehab loan, which includes the cost of repairs on your mortgage. If you flip the home after two years, you may net enough for a substantial profit without paying hefty capital gains tax.
Short sales are another way to locate homes below market value. When a homeowner is heading toward foreclosure, the person may arrange with the lender to sell the property for less than they still owe. Search for preforeclosures in court records to find these homes.
House hacking is a popular term that refers to unique ways to enter home ownership. A tried-and-true method is purchasing a multiunit property and renting out the extra rooms and units. Prepare to assume the duties and risks of a landlord.
Investigate Mortgages With Low Down Payments
Housing programs for low-income families can help buyers with less-than-perfect credit and income. Research which of the following best suits your circumstances.
Veterans Affairs-backed mortgages assist active duty military, veterans, surviving spouses, reservists, and National Guard members. These VA loans have no income requirements and minimum credit score, but lenders who supply the mortgages may add stipulations. The program doesn't require mortgage insurance.
Home loans from the U.S. Department of Agriculture help lower-income buyers with credit scores above 640 purchase dwellings in rural locations. This option also offers a no-money-down loan. Search the USDA Eligibility map to find where to buy a home using these loans and determine if you meet the local income requirements.
The Federal Housing Administration offers loans to help first-time buyers and those with low credit scores or income. Borrowers with a credit score of 500 may get a mortgage with 10% down, and persons with a 580 score only need 3.5% down. Your DTI can be no higher than 45%.
HomeReady and Home Possible are lending programs from Fannie Mae and Freddie Mac, respectively. You only need 3% down, and the money can come from any acceptable source, such as a loan, grant, or gift. The seller can pay closing costs up to 3% of the purchase price, and you may qualify for discounted private mortgage insurance.
Section 8 Housing Choice Vouchers are state-specific programs to help low-income households purchase a property with housing vouchers. Check if your state offers this program and if you meet the requirements, including income limits, employment conditions, and homeowners' counseling program. This program is only available to first-time homebuyers.
Many government agencies and nonprofits offer down payment assistance through a forgivable loan or a grant. Look into other options such as the Good Neighbor Next Door program, Housing Finance Authority loans, and Mortgage Credit Certificate program to alleviate home costs.
Borrow With a Co-Signer
If a family member or close friend has excellent credit and income, that person can co-sign the loan and help you qualify. This is a serious step because if you can't make the payments and default, the co-signer is responsible for paying for the loan.
If a relative or friend is willing to assist you, diligently honor their trust. Communicate about anything that can affect you paying your bill on time. The co-signer may wish to have access to your mortgage statements and missed payment notifications. Since their credit is vulnerable and dependent on you, support your co-signer in any way you reasonably can.
You must either refinance or pay off the loan to release a co-signer. Continue to increase your income, boost your credit, and refinance when possible. You could also build up enough equity to make selling the home a wise financial move, relieving the co-signer of the liability.
Stay Educated About Your Options
Finding a home as a low-income buyer requires extra work, but following a plan should yield results. A home purchase starts you on the road to investing in your most important asset and sets you up for opportunities to buy an even better home or investment property later. Reach out to FHA Insider to subscribe to the latest information with valuable homebuying insights.
