HUD Housing Counselors
The U.S. Department of Housing and Urban Development-certified local housing counseling agencies are a great place to begin.
A housing counselor may charge a small fee. However, he or she can walk you through your federal, state, and local home buying program options and they are a wealth of knowledge. A good housing counselor can help you come up with a housing budget and more.
You can find a counselor in your area through the HUD.
FHA loans are mortgages backed by the Federal Housing Authority. The FHA guarantees that if you default on the loan, it will pay the bank for its losses.
This encourages banks to lend to people who don’t have excellent credit or huge down payments. In fact, you can use an FHA loan to finance up to 96.5 percent of a home’s purchase price. With a conventional mortgage, you can generally finance only 80 to 90 percent of a home’s purchase price, depending on lender requirements.
This means you don’t have to save nearly as much for a down payment. On a $200,000 home, you would have to put down $7,000 for an FHA loan, as opposed to $20,000-$40,000 on a conventional loan.
Also, FHA loans don’t require great credit like conventional mortgage loans might. You still need to show a stable job history and prove you’re in a good position to pay the mortgage. But requirements are much less strict, opening up a mortgage possibility for lower-income individuals and families.
The credit requirements vary by lender. But you can often get a mortgage with average to low credit.
Learn More: What Kind of Mortgage Does Your Credit Score Qualify For?
Other Government Programs
Two similar programs that can reduce homebuying requirements are the Rural Housing Guaranteed/Direct Loan Program and the VA Loan Guaranty Program.
The US Department of Agriculture (USDA) runs the Rural Housing program. It offers both loans made directly through the program and loans guaranteed by the program. It offers loans on single-family and multi-family properties. These programs are specifically for low-income individuals who are unable to obtain normal financing.
Most applicants for a direct Rural Housing loan do not pay a down payment. The program keeps mortgage interest rates very low. And you may be able to stretch your financing period to 33-38 years.
This makes for a very low monthly payment for the lowest-income applicants.
The VA program is specifically for veterans. It’s got some incredible benefits, including the option for a no down payment loan. These low-interest-rate loans don’t require private mortgage insurance, even if you don’t put down a dime. If you get into financial trouble after taking on the loan, the VA also offers payment assistance programs.
For those who qualify, these two programs should be a first-line before checking out the FHA programs. This is mainly because FHA loans do require PMI for the life of the loan. This can add a significant cost to your loan that it’s best to avoid if possible.
Other Special Programs
The HUD and other organizations also offer a variety of programs for lower-income homebuyers. These include:
Good Neighbor Next Door
This program encourages public servants – police officers, teachers, firefighters, and EMTs – to move into areas HUD is trying to revitalize. If you fall into one of these categories and agree to live in a home as your sole residence for three years, the Good Neighbor Next Door Program could knock 50 percent off your home’s list price.
Fannie Mae HomePath
The HomePath program isn’t specifically for low-income home buyers. But it’s a good place to start for first-time buyers.
It’s an online program that breaks down the home-buying process into lessons. The program costs $75, but that gets rolled into your closing costs. And if you complete the program, you can get assistance with those closing costs!
Learn more about the HomePath program here.
Fannie Mae HomeReady
This program, another from Fannie Mae, looks similar to an FHA loan. If you qualify, it might even be better.
The program offers up to 97% financing, and it offers cancellable PMI. (Unlike FHA, which requires a refinance to another loan type to get out of PMI.) You can also use the program in tandem with Fannie Mae’s Homestyle renovation loan program.
Download the HomeReady fact sheet from Fannie Mae here.
Freddie Mac’s Home Possible Program
This program from another government-linked lender, Freddie Mac, also offers 3-5% down payment options. It’s specifically for home buyers with low to moderate-income who live in typically underserved communities. You can find out more here.
Local Homebuying Programs
Because homeowners are more likely to take care of their properties and care about their neighborhoods, some states, cities, and municipalities have homebuying programs of their own. You can find a whole state-by-state list through HUD.
These programs vary from location to location. They may include features like:
- Down payment assistance programs, which may or may not require you to repay the assistance.
- Home renovation programs, which can allow you to buy a cheaper fixer-upper to remodel.
- First-time home buyer programs can require lower down payments and a lower credit score.
Use the HUD’s state directory to find out more about potential programs in your state.
Related: How to Buy Your First Home
Non-profit programs like AmeriDream and the Nehemiah Program used to be one way to obtain down payment assistance. Unfortunately, changes to the FHA program in 2008 mean that homebuyers can no longer use down payment assistance from non-profits.
Still, though, non-profit organizations may be able to help you on your way to homeownership. Here are some options to be aware of:
Habitat for Humanity
This well-known program is widely misunderstood. Many people think that Habitat for Humanity builds free homes for the homeless. Actually, families who are unable to save for or buy a home can participate in the Habitat program and wind up with a mortgage through Habitat.
Habitat vastly lowers homeownership costs by building homes with donated work – and often with donated materials. The families who are accepted into the program get an interest-free, down-payment-free, closing-cost-free mortgage through Habitat. They are required to pay back the mortgage, usually over 15 years.
I have some friends who are working with Habitat now. They’ve been called poster children for the program. They’re a hard-working couple, but they just don’t make enough to support their family of five while saving for a down payment on a home.
Homeownership will be cheaper for them than renting their current apartment, and they’ll help keep the Habitat for Humanity program going by paying back their mortgage.
If you think you might be a good fit for the Habitat program, talk to a local representative. Be warned: getting a Habitat home takes a lot of work, including a financial management course and tons of volunteer hours, but it might be worth your while.
Your Local Community Development Corporation
Community Development Corporations, or CDCs, are often run at a very local level. Here in my own Indianapolis neighborhood, for instance, the Englewood Community Development Corporation works within just a few blocks.
The corporation runs rental properties for low-income individuals but also develops affordable housing. In fact, since I live in an area with one of the highest rates of home abandonment in the country, we have several CDCs around.
These corporations often focus on sustainable, intentional development meant to keep our low-income neighbors in an up-and-coming community instead of pushing them out with rising property prices. Since CDCs are often quite local, you’ll have to ask around your neighborhood to find this type of non-profit to work with.
Related: 16 Types of Mortgages: Which Home Loan is Best for You?
Other, more local non-profits may offer other assistance to homebuyers — including free counseling, homeownership classes, or help with renovating — if you buy a more affordable home that needs some TLC. One place to find such nonprofits is through Neighborworks. You can also ask around in your neighborhood.
What Counts as “Low-Income?”
One question housing counselors often hear is, “What counts as low income?” If you make a reasonable income and can pay your bills, you may not think you’ll qualify for these programs. But you might be surprised!
For many programs, including many HUD-run programs, income limits are actually based on the area’s median income. Depending on where you live, that could be quite high.
In my county, the area median income for 2017 is about $69,900. Many home-buying programs would restrict eligibility to 80% of AMI, so $55,900 for a family of four. In Washington, DC, however, the AMI is $110,300. A family of four with an income of $75,050 would qualify for many low-income home buying programs.
I don’t know about you, but I don’t generally think of a $75,000+ income as low.
Learn More: How to Find the Best Mortgage Lender
With all that said, the point here is to ask. Some of these programs have very high-income limits. Some target first-time homebuyers or veterans, regardless of their income. Others are area-specific and have broad qualification requirements.
You never know what you might qualify for until you ask!
If you have additional tips or programs, please share them below with other readers.
For more tips, check out our Beginner’s Guide to Buying a Home.