America has long seen homeownership as both a sign of economic success and an important step toward achieving and sustaining that success. Studies have linked homeownership to several positive outcomes, including wealth creation and greater educational achievement for children. For low and middle-income families, these potential benefits can be very appealing, but a low income, especially coupled with a poor credit score, can be a major obstacle. Low-income families and middle-income families (a household income less than 115% of the average area income) may find it difficult to buy a house for two specific reasons: access to a line of credit may be sparse, and the money to make a down payment may be difficult to acquire. These hurdles are real and significant, but they are not impossible to overcome. Many federal, state and private programs can help low, and middle-income families buy a house of their own.
These programs fit into three categories: grants, vouchers, and loans. These exist at both the federal, state, and private level.
Housing grants exist, but they are rare and hard to get. Feel free to look into this option, but do not become too attached to the possibility of gaining a grant. The number of grant options is very limited, and the number of people who get grants is equally small.
Good Neighbor Next Door is not described as a grant, but effectively works as one. This effort is designed to give full-time law enforcement officers, firefighters, emergency medical technicians, or teachers a 50% discount on the purchase of a primary residence. Aside from being limited to just the above public service workers, participants must live in the house that they purchase (e.g., not an investment property) in a US Department of Housing and Urban Development (HUD) designated revitalization area. HUD offers a Single Family Home Locator for those looking to find options in designated revitalization areas.
The Individuals and Households Program (IHP) serves people who have suffered from natural disasters. That possibility is not as remote as it may seem. By some estimates, 43% of American homes are at risk.IHP qualification criteria are very strict: only those whose houses have been damaged or lost in an FEMA-identified disaster will be allowed to participate.
You must also not be receiving any financial compensation from insurance, or your insurance payout must be insufficient to cover the cost of your losses. The reimbursement also only covers the cost to replace your primary place of residence.
The Emergency Solutions Grants Program is designed specifically for individuals or families facing homelessness but is not intended to provide long-term housing solutions. Instead, it helps individuals and families who have lost their houses find adequate emergency shelter. These grants also do not go directly to the individuals and families. Instead, the money is used to create and maintain emergency housing to help decrease homelessness.
The Continuum of Care Homeless Assistance Program helps homeless individuals and families find a permanent residence. Like the Emergency Shelter Grants Program, however, money is not delivered directly to individuals or their families and is instead administered through local governments and nonprofit organizations.
The HOME Investment Partnerships Program gives money to local governments and communities for rehabilitation and construction of affordable housing. You may be able to find a low-cost house through this effort if your community or a community in your area has acquired funds to build affordable housing.
Subsidized or guaranteed loans are the most common form of assistance for low and middle-income families. Many programs exist, and those who are earnest about purchasing a house should consider assisted loans to be the option most likely to succeed. These initiatives help low and middle-income individuals with bad credit as well as those who lack the resources to make a significant down payment. There are requirements and obligations, of course, but they are reasonable and achievable.
FHA loans are the single best option for individuals and families looking to purchase a home. FHA loans are insured by the federal government, giving lenders more incentive to lend money to what are perceived as high-risk individuals.
The FHA provides Basic and Adjustable Rate Mortgage Insurance for homeowners, which allows those with bad credit (with a minimum credit score of 500) and those with only modest means to access a mortgage. Individuals with very bad credit scores, e.g., those in the 300s and 400s, cannot apply. The higher your credit score, the smaller the down payment you will require.
All mortgages secured by the FHA must also carry mortgage insurance to reduce the risk of default. There are no minimum income cutoffs, but you must be able to meet certain income-to-debt ratio requirements. You will have to have enough income to afford the house you want to buy, and the FHA must approve the purchase.
The Combination Mortgage Insurance for Manufactured Home and Lot is a separate FHA loan initiative for those purchasing manufactured homes. The FHA will also secure these loans, making a purchase far easier for low and middle-income families.
Rural Housing Loans help individuals and families living in rural areas. The money from a Rural Housing Loan can be used for construction as well as for purchase. Houses bought or built using this program must be “modest, decent, safe, and sanitary.” The loan can be used to repair a home so that it meets that requirement.
If you already have adequate housing, you will not qualify for this program. You must also be able to afford all of the principal, interest, taxes, and insurance on the mortgage. The loan also cannot exceed 41% of your income. Finally, you must have an acceptable credit history, but be unable to obtain credit from other lenders.
Home and Property Disaster Loans offer loans, instead of grants, to families whose properties were severely damaged or lost in FEMA-verified disasters. The Small Business Association delivers the loans, which can be made in amounts up to $200,000 and carry low-interest rates. Renters and owners can borrow up to $40,000 to replace lost or damaged personal property.
The SBA may be able to refinance a mortgage on a house lost in an FEMA-verified disaster, as long as the amount does not exceed the $200,000 loan maximum. This program only applies to those who lost their primary residence. Second homes and investment properties are not eligible.
These programs provide longer than usual repayment periods, between 33-38 years instead of the 30-year period more standard for other mortgages.
There are not many housing voucher programs available. The one that is most likely to make a difference for most low to moderate-income homeowners, is the Section 8 Housing Voucher Program, which provides low-income individuals with financial support for renting adequate and affordable housing. It’s important to note that you cannot use these vouchers toward a purchase. Low-income families may choose to use vouchers, if they qualify, as a way to save money for a down payment.
A few other options do exist for low and middle-income families.
Buying a HUD Home
When individuals who acquired an FHA loan fail to pay their mortgage, HUD will repossess the house and sell it to recoup the cost. Often, selling at well below market value. If you have cash on hand or can obtain a loan (potentially through the FHA as well), you may be able to score a remarkable deal.
You can search for possibilities using HUD’s home search database.
Fannie Mae HomeReady Mortgage
Fannie Mae offers a program similar to that of the FHA, which will allow low-income individuals to acquire a mortgage with a bad credit and a higher debt-to-income ratio.
Property auctions and forfeiture sales
If your family has been able to save a sizable amount of money in anticipation of a down payment, you may be able to use that money on a purchase at auction or for a lower price. Various government organizations will sell and auction repossessed homes. Those homes can sometimes be acquired for very little money down, depending on the situation. Agencies holding these auctions and sales include:
US Marshals Service
Internal Revenue Service
Understand the limitations
Comprehending the limitations of these programs is important. You will not be able to find a house completely free. While some grants and programs will offer you an affordable price, or open up access where access was not previously available, you will always need to use some of your money. You must understand your income-to-debt limitations. Never attempt to purchase what you cannot afford, and avoid acquiring a loan with high interest rates and no money down. If you cannot afford to make the payments, do not proceed. If your credit does not allow you to get an interest rate that is acceptable to you, work to build your credit score so you can secure a better rate before going ahead with a purchase.
The reality of housing grant programs is that there are few real “grant” programs, and those that do exist are very limited. Your best option will always be to build your credit score, save money to acquire a suitable house with a decent down payment, and avoid borrowing more than you can afford to pay back.