11 mortgages and programs that can help low-income borrowers to buy a home

Over the past couple of years, homeownership has become increasingly unaffordable. Home prices increased 30% from 2020 to 2022, and mortgage rates are now nearing 6%. As both prices and rates continue to rise, many hopeful buyers are wondering: Can I actually afford to buy a home on my income?

While there’s no formal income limit required to buy a home,
mortgage lenders do typically limit the amount of debt you can take on relative to your income. Because of this, low-income individuals often struggle to qualify for a mortgage.

“When it comes to real estate, low-income homebuyers face a number of challenges,” says Boyd Rudy, owner and associate broker at Dwellings Michigan. “Not only do they often have difficulty securing financing, but they also may have limited resources for making a down payment and covering other associated costs.”

While it can be challenging, there are a variety of home loans and other programs specifically geared toward low-income individuals that offer lower costs, better rates, and things like down-payment assistance that can make homeownership more affordable for those who qualify.

How to qualify for a home loan with low income

Qualifying for a mortgage is a balancing act between your credit, debts, income, and down payment. If you have a low income, working on other factors in your application can help compensate for that.

The main hurdle for low-income borrowers is likely going to be their debt-to-income (DTI) ratio. Your DTI ratio calculates the percentage of your income that you spend on debt. If you earn $4,000 each month and your monthly mortgage payment is $2,000, you have a DTI of 50%.

Generally, your DTI will need to be 50% or less, but it can vary depending on the loan type and lender. Your DTI limits how much house you can afford, which can make home shopping challenging for low-income folks. If your DTI only allows you to borrow up to $150,000 and the average home price in your area is significantly higher than that, you might have a hard time finding a home in your price range.

Lenders will also look at your credit score and how much you have for your down payment and closing costs.

For conventional mortgages, you’ll usually need a score of at least 620. FHA mortgages require a score of 580. The higher your score, the more likely you are to be approved. Higher scores also help you to get more attractive interest rates.

You’ll need to put at least 3% down for a conventional mortgage and 3.5% down for an FHA mortgage. If you can put down more, you might have an easier time getting approved with a low income. Just don’t forget to factor in closing costs, which typically equal 3% to 6% of the loan amount.

Here are some things you can do to improve your chances of qualifying for a mortgage with low income:

• Pay down debts you currently owe to lower your debt-to-income ratio
• Determine how much you’ll need for a down payment plus closing costs, and plan out how much you’ll need to save each month to reach your goal
• Get your credit score to at least 620 – using less of your available credit on your credit card is a relatively quick way to improve your score
• Apply with multiple lenders, especially credit unions, which are often better positioned to serve low-income clients
• Things like child support or disability income can be used to qualify for a mortgage, so be sure you’re including all sources of income on your application
• Consider having someone co-sign your mortgage

Low-income home loan options

As you research your different mortgage options, look for ones that allow low down payments and are geared toward low-income borrowers.

“Fortunately, there are a number of mortgage and assistance programs available that can help low-income homebuyers navigate the homebuying process,” Rudy says.

Conventional loans

Conventional loans are mortgages that aren’t backed by a government agency. Many of these mortgages are backed by either Fannie Mae or Freddie Mac, which allow down payments as low as 3%.

Some lenders may also have their own specialty mortgage options that allow low down payments and come with special benefits for low-income or first-time homebuyers. Alliant Credit Union, for example, has a 0% down option for first-time homebuyers that doesn’t require private mortgage insurance, while Chase offers grants that can be used toward your down payment.

FHA loans

Mortgages insured by the Federal Housing Administration are often a good fit for low-income borrowers because they allow low down payments, have less stringent requirements, and come with lower rates than conventional mortgages.

“One of the best mortgage programs for low-income borrowers is an FHA loan,” says Bill Gassett, realtor and founder of Maximum Real Estate Exposure. “The program puts a significant amount of people into a home who would otherwise not qualify.”

FHA loans require a down payment of 3.5% and a credit score of at least 580, though you can potentially be approved with a lower score if you can make a larger down payment.

An FHA 203(k) loan might be a good fit for you if you’re looking at homes that are priced lower but need some repairs. These loans let you purchase a home and finance improvements to it, all in a single mortgage.

USDA loans

Low-income individuals who live in rural or suburban areas can apply for a USDA loan, which is a mortgage guaranteed by the Department of Agriculture. With one of these mortgages, you can put zero down without having to pay mortgage insurance. You’ll typically need a credit score of at least 640 to qualify.

If you’re very low income and currently don’t have “decent, safe, and sanitary housing,” you might be eligible for a direct USDA loan. With direct USDA loans, the USDA is the lender.

VA loans

If you’re a service member, veteran, or surviving spouse, you may be eligible for a VA loan. These mortgages are guaranteed by the US Department of Veterans Affairs. It allows 0% down payments with no mortgage insurance. VA loans also typically have lower rates than conventional loans.

To qualify, you’ll need to meet minimum service requirements. Many lenders also require a credit score of at least 660, though some will allow scores of 620 or even 580.

Manufactured home loans

If you’re looking to purchase a manufactured home, finding financing can be a little trickier than financing a standard, single-family home purchase, but it’s not impossible.

Fannie Mae and Freddie Mac will guarantee mortgages on manufactured homes that meet certain specifications, but not all lenders offer these mortgages. The FHA will also insure mortgages used to purchase manufactured homes. You can search its list of approved lenders to find a lender that offers these mortgages. VA loans can be used for these types of homes as well.

If you’re having trouble finding a bank that will lend on a manufactured home, some borrowers use chattel loans or personal loans to purchase these homes.

Housing Finance Agency loans

Your local or state housing finance agency may offer mortgages directly or work with certain lenders to help low-income individuals purchase a home. Use our table below to find your state’s housing finance agency and see what programs it offers.

Other programs for low-income buyers

HUD homes

The US Department of Housing and Urban Development sells FHA-foreclosed homes on its HUD Homes website. To buy one of these homes, you’ll need to work with a HUD-approved real estate broker, who will submit a bid on your behalf.

HUD Homes are listed at low prices, but they’re sold as-is. This means that the seller won’t make any repairs prior to the sale. So if a home is in need of a lot of repairs, you could end up spending more in the long run than if you’d purchased a move-in-ready home on the regular market.

Good Neighbor Next Door program

The Good Neighbor Next Door program helps law enforcement officers, teachers, firefighters, and emergency medical technicians purchase a HUD Home at a 50% discount in eligible “revitalization areas.”

However, not all HUD Homes are eligible for the Good Neighbor Next Door program, and inventory is usually extremely limited. As of June 2022, only two states had Good Neighbor Next Door homes available.

Section 8 homeownership voucher program

The Section 8 housing choice voucher program provides rental assistance to very low-income households. If you’re a Section 8 participant, you may be eligible for its homeownership program.

With this program, you can use your housing choice voucher to purchase a home and receive monthly assistance. You can only participate in this program if your local public housing agency offers it, and not all agencies do.

Down payment assistance

Many different entities offer down payment assistance in the form of loans or grants. Check with your city, county, and state’s housing authorities to see if they offer this assistance to low-income or first-time homebuyers. Some nonprofits may offer help as well.

Pay attention to the type of assistance offered. Grants don’t need to be paid back, but loans often do. Some loans, however, may be forgivable if you remain in the home for a certain amount of time.

Mortgage credit certificate

Mortgage credit certificates are programs run by state and local housing finance agencies that allow qualifying homebuyers to get a tax credit on the interest they pay on their mortgage and reduce their tax bill by up to $2,000 per year.

Where to find low-income housing assistance

To get help on a local level, you can reach out to your city or county’s housing agency. You can find your local public housing agency using HUD’s search tool. HUD can also help you find information specific to your state.

If you want to learn more about the programs available to you as a low-income homebuyer, you can also reach out to your state’s housing finance agency. Here’s where you can find help in every state, according to the National Council of State Housing Agencies.