About Low Income Loans and Low Mortgage Rates
Mortgage lenders generally rely on two ratios to determine whether a prospective homebuyer will qualify for a standard loan. One is the ratio of total monthly housing costs to gross monthly income. The other is debt to income. Because both ratios rely on income, it is difficult for homebuyers with low income to qualify for home loans. There are programs, however, that modify the ratio requirements, reduce the cost of housing and lower interest rates so that low income applicants can qualify for mortgages.
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Ratios
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The first two steps any prospective homebuyer should take are to order a credit report and calculate his housing and debt to income ratios. A low credit score will result in either loan disapproval or a higher interest rate, so it is important to raise your credit score as high as you can before applying for a loan. To calculate your housing ratio, take your monthly gross income and multiply it by .28. The product is the total monthly allotment for housing costs many lenders will offer. Using an online mortgage calculator and an average 30-year mortgage rate, you can determine the maximum mortgage you can afford. For debt to ratio, add all monthly debt payments shown on your credit report to your monthly allotment for housing costs. Divide this monthly debt by your monthly gross income. The resulting number should be under 40 percent. If the mortgage you qualify for is too low to buy a median-priced home in your region and/or your debt to income ratio is over 40 percent, you may qualify for a low income mortgage or other housing assistance.
History
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During the Great Depression, home ownership rates hovered at 40 percent (compared to almost 70 percent in 2010), 50 percent down payments were required for home purchases, and two million construction workers were unemployed. Congress created the Federal Housing Administration (FHA) in 1934 to help people buy homes and put construction workers back on the job. The FHA does not lend mortgages. It insures loans which require low down payments while allowing higher housing and debt to income ratios. Over the past 50 years dozens of other federal, state, local and private programs have followed the FHA's lead in providing assistance to low income homebuyers.
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Programs
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Most banks offer FHA mortgages. Another federal program, the Financed Permanent Buydown Mortgage plan, lowers interest rates to homebuyers. Many states offer additional programs. For instance, New York provides low interest rates, down payment assistance and reasonably priced housing to low income buyers. Cities often use redevelopment funds to build low income housing, some of which is available for purchase. Some cities, such as San Francisco, require developers to set aside 10 percent of the units in every residential development for purchase by low and moderate income buyers. Nonprofit organizations, such as Habitat for Humanity, build homes with the help of volunteers, and then offer the homes at reduced cost with low interest loans to qualified buyers. The buyers contribute "sweat equity" by helping to build their own homes.
Benefits
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The program benefits are obvious. They allow people who otherwise would not be able to buy a home the same opportunity available to higher-income homebuyers. According to the U.S. Federal Reserve, homes account for over 30 percent of the wealth of American families.
Other Considerations
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During the housing bubble preceding 2007, standards for some mortgages were relaxed, allowing almost anyone to qualify. The basic ability of a homebuyer to continue to make mortgage payments no longer was a paramount concern of lenders. This resulted, of course, in a subsequent foreclosure bonanza in which many people---of all income brackets---lost their homes. The most important question any homebuyer should be able to answer, affirmatively, before buying a home is, "Will I be able to keep making mortgage payments throughout the loan term?"
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References
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