Are Accessible Home Loans Myth or Reality?
As home prices drop in more parts of the US than they have in over a decade, it can be a good moment to think about becoming a homeowner. Additionally, experts expect the 30-year mortgage rate to fall from an average of 6.25% to 4% in 2025. However, all your plans can easily smash against the mortgage lenders' requirements you must meet to qualify.
In 2021, the mortgage finance giant Fannie Mae stated that it was aimed at simplifying the process of getting home loans for borrowers with limited credit and income. But is the situation really getting off the ground? Let's find out what home loan options are now available to people with limited incomes and less-than-ideal credit scores who are involved in our campaign to change the low-paying construction industry for the better.
What Is Mortgage and How Does It Work?
A mortgage is a financing option aimed at helping individuals purchase a home, land, or other real estate without paying its entire price upfront. Mortgage loans are a long-term type of borrowing. Repayment terms may be up to 15 or 30 years, and the money is repaid in a series of monthly installments.
Due to long loan terms, mortgage interest rates are typically variable. This means that they can fluctuate over time under economic conditions. Therefore, your monthly payment amount can also change at some point. However, fixed-rate mortgages are also available. They are just more expensive due to the financial risks a lender carries in case of any significant economic changes.
A mortgage loan typically requires a borrower to make a down payment. Its amount is usually expressed as a percentage of your house's estimated price. However, some options can come with no down payment, meaning that a lender provides you with the entire real estate cost.
You can apply for a mortgage after you decide on a property that you want to purchase or even while you're shopping around for one. When you know how much money you can get with a home loan, it will be easier for you to understand what property you can afford. It's recommended to pre-qualify for a home loan through several mortgage lenders to compare their offers and have a better understanding of the current market condition. Pre-qualification usually doesn't affect your credit score.
After you choose a house and come to an agreement with a seller, you can close the deal with a lender with the most favorable loan terms. If you get final approval, you need to make a down payment to a lender. Then, a seller will transfer ownership of the property to you and receive the agreed-upon amount.
When it comes to a mortgage, the house you buy always serves as collateral. This means that your lender can seize it if you default.
Common Mortgage Terms and Requirements
Below are some key terms you need to know before getting a mortgage. Most of them will be displayed in your loan agreement, so you need to be informed to understand what it is about.
Promissory note. This note outlines your loan details and repayment terms, such as:
- Interest rate. An average of 7.25%-7.27% can be applied for a 30-year fixed-rate mortgage. The exact rate you will be offered depends on your credit score and mortgage type;
- Repayment period. Home loans come with repayment terms between 10 and 30 years;
- Total loan cost. This parameter displays how much you will have to pay back within the whole mortgage lifetime;
- Your monthly payment, including amounts of both principal and interest payments;
- The moment when your loan payment is considered late. This will help you stick to the due date and avoid delays. If you pay late, a lender typically charges penalties you need to pay in addition to your monthly loan payment.
Deed of Trust. This document is an agreement between all the parties involved (typically a borrower, a lender, and sometimes a trustee). It provides a lender with a repayment guarantee if you stop paying your mortgage. This means that a lender's authority will be able to take control of your home in case of default.
Amortization. This term means that you pay off your loan gradually on a monthly basis, and the amount you owe decreases each time you pay. Some mortgages involve paying more in interest at the beginning, meaning that the biggest portion of your monthly payment goes toward covering interest, not your loan principal. However, the situation will change over time.
Note Rate. This rate is the interest rate that you pay annually. It's usually expressed in a percentage of the amount you borrow.
Annual Percentage Rate (APR). An APR is higher than a mote rate as it includes not only the annual interest you pay but also any additional fees and charges.
Mortgage Closing Costs. This term refers to additional costs a lender charges for the origination of your loan and preparing various documents. These costs usually include origination fees, funding your loan, title fees, appraisal fees, insurance, and more. Mortgage closing costs are usually somewhere between 2% and 6% of the amount you borrow.
Eligibility criteria depend solely on a lender, so they are not fixed and can vary widely. Below are a few common requirements you need to meet to get an average conventional mortgage:
- Be of legal age;
- Have a credit score of at least 620;
- Make a down payment of about 6%;
- Have a debt-to-income ratio of no more than 45%;
- Have a stable income.
What Home Financing Options Are Available to People with Low Income and Limited Credit?
If you realize that you can't meet the requirements below, don't worry. Your mortgage options are not limited to conventional offers. Below are some programs designed to help under-banked home buyers access housing financing.
Special Mortgage Loans
Special mortgage loans work similarly to conventional home loans but with more relaxed eligibility requirements. Indulgences usually include reduced income and credit score requirements and down payment amounts. For example, HomeReady and Home Possible programs provided by Fannie Mae and Freddie Mac can help you access a mortgage loan with only 3% down. This amount can come from a gift, grant, or even another loan. However, a minimum credit score of 620 is required to qualify.
Housing Assistance Programs
Housing assistance programs are typically offered by the government. They are designed to provide low-income home buyers with accessible financing options without paying anything upfront. More than that, most programs don't set any credit score minimum. Below are the most popular options to consider.
FHA loans are financing options that are backed by the Federal Housing Administration. It offers more lenient eligibility requirements, which include a minimum credit score of 580 (if you make a 3.5% down payment) or even 500 (for home buyers who can pay at least 10% down).
If you're a veteran, active-duty service member, or surviving spouse, this housing assistance program can help you make your American dream come true. VA Loans provide assistance to military home buyers. This program is backed by the Department of Veterans Affairs and offers several benefits over other programs. First, eligible applicants can get a loan without paying anything down. Also, there's no mortgage insurance required for the program. Finally, there are no minimum credit score requirements, so even borrowers with bad credit can qualify.
Residents of USDA-approved rural areas can qualify for USDA loans with no money down. These loans are designed to lend a helping hand to moderate- and low-income individuals. Thus, you also need to meet income guidelines to qualify. Although there's no down payment needed, a minimum credit score of 640 is typically required.
HUD Homes is a program that offers a steep discount on houses that were foreclosed under by the FHA. HUD homes are purchased through a bidding process and are sold as-is. You can qualify if you plan to live in a HUD home for at least 12 months after purchase. Additionally, it must have been at least 24 months since your last HUD purchase.
What Can Be Considered Income for a Mortgage Loan?
Even when you apply for special mortgage loans and housing assistance programs, your income will be a determining factor. Although the requirements will be more relaxed, a lender or loan issuer wants to make sure you can handle a loan properly and make your payments on time.
However, lenders often consider other income sources besides your earnings. Disability benefits, child support, alimony, and pensions can also count toward income when it comes to mortgages. Additionally, many lenders can take into account your freelance or self-employment income and look at your savings.
What Documents Do You Need to Apply?
Before you apply for a mortgage, you need to go through extensive paperwork and gather some mandatory documents. Below is the list of some basic documentation to provide:
- Proof of identity;
- Utility bills;
- Bank statements;
- Pay stubs;
- Council tax bills.
If you're going to apply for a specific program, check out its document requirements on the website or contact the agency that backs it.