The Federal Housing Administration created government mortgage insurance to help low-income people buy homes. Affordable down payments, flexible income and asset guidelines, and even down-payment assistance for qualified borrowers make FHA-backed loans an attractive, and often necessary, option. Low-income borrowers can get an FHA loan with proof of income and a credit review. They must also follow any program-specific income guidelines.
Defining Low-Income Borrowers
The Department of Housing and Urban Development, which oversees the FHA and other federal housing programs for low- and moderate-income people, defines "low income." It categorizes people seeking home financing or rental assistance as very low-income, low-income and moderate-income. At the time of publication, those classified as low-income earned 80 percent of their area's median family income. To account for the difference between low-income borrowers in affluent, or high-cost, areas, and borrowers in average-price or poor areas, higher low-income limits may apply.
Qualifying With Low Income
Getting an FHA-backed mortgage begins with contacting an FHA-approved lender. The FHA insures loans funded by approved banks, mortgage companies, and government or nonprofit agencies approved to participate in the FHA's programs. Low-income borrowers must submit income and asset documentation, including tax forms, pay stubs and bank statements. FHA guidelines allow lenders to count non-employment income, such as governnment assistance and Section 8 Homeownership Vouchers, as income. Local public housing agencies may offer homeownership vouchers to persons eligible for the Section 8 Housing Choice Vouchers Program, a government rent subsidy.
Coming Up With Down Payments
The FHA gives low-income borrowers the opportunity to finance the required 3.5-percent down payment or obtain it in the form of a gift or grant from an approved source. To get down-payment financing, borrowers must contact a local housing agency for availability and eligibility requirements. Government entities and nonprofits finance all or a portion of the down payment, usually with lower-than-market interest rates and flexible repayment terms. A government or nonprofit agency can also provide down payment grants, which don't require repayment. Low-income borrowers may receive a monetary gift for the entire down payment from a relative, an employer, a union or a nonprofit, which they don't repay.
Meeting Program Criteria
Federal, local and state-run programs that help low-income FHA borrowers set their own qualifying guidelines. You must meet the stricter of the lender's or the down-payment assistance program guidelines. Although FHA sets guidelines for lenders to follow, many lenders also impose more stringent standards, such as higher credit score requirements. Many assistance programs are available for low- and moderate-income people who earn 80 percent to 120 percent of the area median income.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.