Homes often cost multiple times more than couples make in annual income. And it should be no surprise; most people have a choice between buying a high priced home, or paying the same amount in monthly rent payments, but never owning anything. So how do low income home loans work when real estate prices, relative to income, are so high? We’ll help you make sense of this conundrum.
The US government defines low income as being between 50 and 80 percent of the median income in a particular area. To get a rough idea of whether or not your income is between these two thresholds, simply call the local government, or do a quick search online to find the median income for your city or zip code.
In rural areas, where incomes are most likely to be below local medians, the US government has set up a program to allow low income home loans to future homeowners. Rural, USDA backed home loans can be extended beyond the typical amortization for other loans. Low income home loans often have repayment periods which extend as far out as 38 years, which is 8 years (26%) longer than the duration of a typical home loan.
Do note that rural areas are not necessarily areas where the number of farms outnumber people. A “rural” designation is given by the USDA, and there are varying qualifications for what makes a particular area “rural,” and thus approved for a USDA-backed, low income home loan.
The Federal Housing Authority is not expressly limited to low income homeowners, but it is a great program for people who have low incomes. In an FHA loan, the borrower will have to meet certain criteria including debt to income ratios and qualifications (a 640 credit score is preferred).
However, once approved for an FHA loan, the program is one of the least restrictive. In fact, the FHA requires only 3.5% down payments for the purchase of a property, compared to 20% or more for conventional loans that are not issued with the help of the US government. You can apply for an FHA loan at any mortgage lender or bank, and usually be pre-approved for a loan within less than two business days, pending that you are a US citizen and can quickly prove residency.
Several states have a housing authority, which make available financial aid to pay for a home, directly or indirectly. In working with your state government, you’ll be closer to decision makers, and it tends to be easier to “bend the rules” so to speak in order to be approved. Remember, the goal of any government program is to put as many homeowners into homes as is possible, and you should never shy away from help because of an immediate disqualification. In many cases, gray areas exist to qualify borrowers who would not normally meet perfectly the lending requirements.
Temporary or permanent
Anyone seeking a low income home loan should consider whether or not their earnings potential is limited permanently, or whether their low income is merely temporary. If you have suffered a job loss, and income has suffered as a result, it might be best to forego a low income home loan until you can find another job.
If, on the other hand, you have earned lower than median wages for a significant period of time, it might be best to go forward with a low income home loan. You’ll need to prove your income, and, even though your wages are lower, show that you can make the monthly payments on time and without fail. Do note that low income is not necessarily a sign that you cannot make good on your monthly payments. Many times, borrowers with very large incomes default on loans because they were overextended, and thus relatively poor because they had purchased too much home for their income.
Low income borrowers who do not reach too far into high-priced areas should be able to find a lender, whether the lender is the government, or a private financier. However, you will have to jump through more hoops, fill out more paperwork, and have a better than average credit history, which shows you can make good on debts for long periods of time.