Low-Income Home Loans: Requirements and Types
Having a low income doesn’t automatically disqualify you from buying a home. In fact, there are many programs available to help you reach your homeownership goal. Depending on other important factors — like your credit score, existing debt, location and profession — you may qualify for a mortgage through one of the low-income home loans detailed below.
Key takeaways
- Home loans for low-income homebuyers include FHA loans, VA loans and USDA loans.
- Eligibility guidelines, including down payment and credit score requirements, vary by loan type.
- Some states offer homebuyer assistance programs, including grants and tax credits.
At a glance: Home loans for low-income borrowers
| Program | What does it offer? | Who is it best for? |
|---|---|---|
| Fannie Mae HomeReady® loans | Down payment as low as 3% | Low-income buyers who are struggling to come up with a down payment |
| Freddie Mac Home Possible® loans | Down payment as low as 3%, reduced mortgage insurance | Low-income buyers with limited down payment funds and a 660 credit score or higher |
| FHA loans | Down payment as low as 3.5%, flexible credit requirements | Buyers with a credit score under 620 |
| Good Neighbor Next Door | Home purchase discount and $100 down payment option | Public servants who are willing to live in a revitalization neighborhood for at least three years |
| VA loans | No money down, limited closing costs | Military-affiliated homebuyers and their families |
| USDA loans | No down payment or mortgage insurance required | Low and moderate-income buyers in rural areas |
What are low-income home loans?
Low-income mortgages are loans designed to address the issues many low-income homebuyers face: debt, low credit and the difficulty of saving a large down payment. Typically, low-income home loan programs assist homebuyers through a combination of:
- Lower down payment requirements
- Flexible credit requirements
- Reduced closing costs
- More affordable mortgage interest rates
- Discounted mortgage insurance
In many cases, low-income home loan programs actually bar people with too high of an income from participating.
Low-income home loans: Key points
- Having a low income doesn’t limit your ability to qualify for a loan. Rather, it’s the relationship between your income and debt that matters. Lenders will evaluate your debt-to-income (DTI) ratio when you apply for a mortgage. Most view a DTI below 35% as favorable.
- If the down payment is your main hurdle, look for low- or no-down-payment loan options. It’s a myth that you have to put down 20% — there are plenty of loans that require far smaller down payments.
- Homebuying assistance programs can help cover your down payment and closing costs. In some cases, these funds don’t have to be repaid.
Right now, mortgage rates are high and the median home price in the U.S. sits at around $404,000 (this, of course, can vary greatly depending on where you live). This may seem intimidating, but here are six loan programs for low-income buyers that could be your ticket to homeownership — even in today’s tough market.
Fannie Mae HomeReady® loans
Best for: Low-income buyers struggling to come up with a down payment.
The HomeReady® mortgage program from Fannie Mae offers home loans for low-income prospective homebuyers with limited cash for a down payment. Its more flexible guidelines make it easier for borrowers to qualify, and monthly mortgage insurance can be lower than with conventional loans. Buyers are also allowed to use gifts or grants to cover their down payment and closing costs.
Both first-time homebuyers and repeat buyers are eligible. However, if all borrowers on a loan are first-timers, at least one borrower will need to take a homebuyer education course.
Eligibility requirements include:
- Minimum 620 credit score
- Minimum 3% down payment
- Maximum 80% of the area median income (AMI)
Freddie Mac Home Possible® loans
Best for: Low-income buyers with limited down payment funds and at least a 660 credit score.
Freddie Mac’s Home Possible® mortgage program is similar to HomeReady, but requires a slightly higher credit score. Otherwise, it offers similar benefits: discounted mortgage insurance, flexible guidelines that help more people qualify, a low down payment and the ability to use a gift toward the down payment. You can even use sweat equity (which refers to the time and physical labor you put into making improvements on your home) to cover some or all of your down payment and closing costs.
Both first-time and repeat homebuyers can qualify. At least one borrower is required to complete a homeownership education course if all borrowers on a Home Possible loan are first-time buyers.
Eligibility requirements include:
- Minimum 660 credit score
- Minimum 3% down payment
- Income less than or equal to 80% of the AMI
FHA loans
Best for: Buyers with a credit score under 620.
The Federal Housing Administration (FHA) insures FHA loans funded by approved lenders. Because they have looser requirements, FHA loans can be a good option for homebuyers who can’t reach the 620 credit threshold required by conventional loans or struggle to afford the closing costs on a loan.
You could qualify for an FHA loan with a credit score as low as 500, but you’ll need to make a larger down payment. All borrowers are required to pay upfront and annual FHA mortgage insurance premiums, no matter their credit score or down payment amount. FHA borrowers who make the minimum 3.5% down payment will pay FHA mortgage insurance for the life of the loan.
Eligibility requirements include:
- 500 to 579 credit score with a minimum 10% down payment
- 580 credit score with a minimum 3.5% down payment
- Meeting your county’s FHA loan limits
See current FHA loan rates today.Good Neighbor Next Door program
Best for: Public servants who are willing to live in a revitalization neighborhood — determined by factors such as median income and homeownership rate — for at least three years.
The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) allows homebuyers in eligible public service careers the opportunity to purchase a HUD home at a 50% discount. You don’t have to use an FHA loan to buy your home under the program — but if you do, the minimum required down payment is only $100.
Eligibility requirements include:
- Working full-time as a pre-K through 12th-grade educator, emergency medical technician, firefighter or law enforcement officer
- Buying a home in a HUD-designated revitalization area
- Committing to live in the home for at least three years
- Having a minimum 500 credit score
VA loans
Best for: Veteran and active-duty homebuyers and their families.
U.S. Department of Veterans Affairs (VA) offers a mortgage program to help veterans, service members and surviving spouses purchase homes. The VA isn’t a direct mortgage lender, but it does guarantee a portion of the loan; this allows borrowers the ability to receive more favorable loan terms, such as a lower interest rate.
VA loans don’t have a minimum down payment or mortgage insurance requirement. However, they do charge a VA funding fee, which varies depending on your down payment amount. The loans also limit the amount you can be charged for closing costs, and the seller may pay a portion of the closing costs. In addition, as of 2020, there are no VA loan limits for borrowers with full VA entitlement.
Eligibility requirements include:
- Valid certificate of eligibility (military service document)
- Minimum amount of service (depending on the type of service member you are or were)
- Preferred minimum 620 credit score
- Required VA funding fee to offset program costs to taxpayers
See current VA loan rates today.USDA loans
Best for: Low- to moderate-income buyers in rural areas.
The U.S. Department of Agriculture (USDA) also insures low-income home loans provided by approved lenders. USDA loans cater to homebuyers with a modest income and don’t require a down payment.
Eligibility requirements include:
- No set minimum credit score, but lenders often require a 640 or higher
- Having eligible income that falls within local income limits
- Purchasing a home in an eligible rural area
How to get a home loan with low income
- Increase your income or lower your debt. If you have the time, pick up a side hustle to increase your income and save up for closing costs and a down payment. You should also prioritize paying down your outstanding debt, especially credit card balances, which can help lower your DTI ratio.
- Look for homebuying assistance. Check with your state’s housing finance agency for available homebuying assistance programs, including grants, loans or tax credits to help cover your down payment or closing costs. Many of these programs target first-time homebuyers.
- Get a cosigner. Conventional and government-backed loan programs allow cosigners, which means you can add someone else’s income to your own to qualify for a mortgage.
- Get a mortgage preapproval. Home sellers are more likely to take you seriously if you have a mortgage preapproval when you put in a purchase offer. A preapproval states how much a lender might be willing to lend you, based on a review of your overall financial picture.
- Choose your real estate agent wisely. Focus on finding a real estate agent who’s knowledgeable about local housing conditions, as well as local and national homebuying programs for low-income borrowers.
- Start saving as early as possible. Having the cash to cover a down payment is one of the biggest hurdles facing low-income homebuyers. But even if you choose a zero-down loan program, you’ll need cash to pay for closing costs, which typically run from 2% to 6% of the loan amount (although the programs listed above generally feature reduced closing costs).
Factors that could raise your offered rates or closing costs
Borrowers with the following characteristics may face interest rate increases or extra charges at closing:
- A credit score below 780 (as well as those with both higher scores and higher LTVs)
- An LTV ratio above 30%
- An adjustable-rate mortgage paired with an LTV over 90%
- A loan for a condominium and an LTV over 60%
- A loan for a manufactured home
Ready to get customized lender offers? Get Personalized Rates TodayFrequently asked questions
Yes, it’s possible to get home improvement loans with a low income, but they can be challenging to find. You can start by researching government assistance programs in your area. For example, your state may offer grants or low-interest loans to help financially strapped homeowners complete home repairs. USDA borrowers may qualify for the Section 504 Home Repair Program, which provides grants to low-income elderly homeowners to help remove health and safety hazards.
Rent-to-own programs are an appealing option for low-income buyers, as you don’t have to save up for a down payment and pay rent at the same time. But there are potential downsides, including fees and possibly paying above-market rent. Make sure you consult with a loan officer and have a plan in place to become mortgage-ready within your option period before committing to rent-to-own.
An FHA loan will typically be the easiest mortgage to qualify for. It offers the lowest credit score requirement — far lower than for a conventional loan — and requires only a 3.5% down payment. VA and USDA loans are even easier to qualify for than an FHA loan, but they’re only available to certain buyers.
There is no minimum income required to get a mortgage. Remember, what matters most is your DTI, not your income. If you’ve saved up for a down payment and you have a decent credit score and reasonable DTI, you should be able to get a mortgage. Just don’t expect to buy any house, in any location, for any amount — you’ll be limited, like all homebuyers, by what you can afford. Our home affordability calculator can help you estimate the monthly payment and loan amounts that may work for you.
Instead of thinking about the income needed, it may help to think in terms of the down payment and monthly payments required. To buy a $400,000 home with a 30-year conventional loan, you would likely need at least $12,000 to cover the down payment, as well as the ability to afford a $3,162 monthly mortgage payment. Use a mortgage calculator to experiment with different loan values and see what your payments could look like.