How to Buy a House with Bad Credit and Low Income in New York
New York is one of the toughest, most expensive real estate markets in the world. As a result, many low-income people who want to buy a home have left New York entirely.
Some went a stone’s throw away to New Jersey, while many migrated (back) to the South.
Then, compound low income with poor credit?
To use an old-school New York phrase: Fuhgetttttabout it!
So it would seem…. But there are still ways to become a proud New York homeowner—despite these obstacles. Here are some ways to (still) get the keys—and the deed—to your new home:
- Being medium or low-income doesn't mean that you shouldn't be able to buy a home.
- Bad credit can be a big stumbling block to purchasing a home, but repairing your credit is not impossible.
- Having some savings as well as being a first-time home buyer helps.
- Most options for low-income or applicants with bad credit are government-backed programs, such has FHA, VA, Fannie Mae, Freddie Mac, and HUD.
- Many of these programs allow a low down payment as well as low interest rates.
- Some conventional loans may also be right for certain applicants who meet the private lender's requirements.
- Checking with local community development organizations might provide additional resources.
What Does It Mean to Be Low-Income?
What qualifies as low-income earnings varies from place to place. This is because many lenders base their income limits on an area’s median income.
However—especially in a place like New York—that number could be high.
For instance, according to the site Data USA (co-created by Deloitte), the median income for Brooklyn Heights and Fort Greene is $85,846.
However, according to a 2011 piece in The L Magazine, the median income at the Walt Whitman Houses in Fort Greene was $9,001 (based on a census tract).
This demonstrates how widely income levels can vary in New York neighborhoods—particularly gentrifying ones.
Thankfully, some of the lending programs that are ideal for low-income homebuyers have fairly high income limits, which may qualify for the local median amount.
There are other programs solely devoted to first-time homebuyers—regardless of income—and others whose requirements don’t factor in income alone.
How Can You Clean Up Your Credit?
Although this article largely focuses on options for purchasing a home with a low credit score, cleaning up your credit is one of the best things one can do in life.
It increases once-narrow options—not just for home buying, but in all areas of life.
That’s why cleaning up your credit is one of the first things you should seriously consider doingbefore exploring buying a home.
One of the things lenders look at is your debt-to-income ratio (DTI): your monthly debt payment amount, relative to your monthly income.
While conventional loans usually have a maximum DTI of 40%, those with low income and a higher debt load can get approved for nonconventional (usually government-backed) loans.
Also try to clean up your credit score—which weighs heavily in obtaining a loan.
Credit scores range from 300–850 and are based upon things like on-time payments; how much of your credit limit you’ve used; how far back your credit record spans; what types of accounts you have; and if you’ve had recent inquiries (the latter can happen, for instance, when you open a new account).
Your credit profile consists of your credit report and your credit score.
You can receive a free copy of your credit report from the three major agencies, Experian, Equifax, and TransUnion, by going to www.annualcreditreport.com.
While the article focused on rentals, many of the principles also apply to homebuyers, including: correcting errors on your credit reports; reducing high balances; behavioral adjustments you can make to avoid late payments; and FICO model updates.
Some "quick fixes" you may find in the article include fixing errors, paying down your balances, and opening new credit cards (only in certain cases), and ask for a credit limit increase.
In addition to getting your credit up to snuff, during this preparatory period, bring your budgeting skills up to par as well.
Along with saving for your down payment (a minimum of 5% of the price range of the home you’ll be seeking. Note that 20% is the number most lenders favor), you’ll also need a financial cushion for unforeseen expenses like home repairs.
Also begin to do a test run with your budget: If you were now in your actual home, would you be able to swing the monthly costs involved—in addition to your current monthly expenses?
(Access a mortgage calculator, which can help give you estimates of the down payment and monthly numbers you’d be working with as a homeowner.)
Also work early on with a real, live lender to do this type number crunching—as well as to help you get pre-approved for a loan.
Bear in mind that—contrary to how it sounds—pre-approval does not mean that you are guaranteed to get a loan, but that you’ve been vetted for potential eligibility (based on the financials and paperwork you’ve submitted).
If you do not have credit, you can start by applying for a secure credit card, which involves a fee.
After keeping your secure credit card in order for 6 to 12 months, paying your balances on time, you may be able to "graduate" to real credit.
The latest FICO model also
Vet Your Eligibility, Based On FICO Score and Down Payment
We’re about to familiarize you with a number of loan and purchasing options (from FHA to VA), but we thought we’d first help you narrow down the process by figuring out which loans youdon’t qualify for—based on the required down payment amount and credit-score range.
We’ll look at two of the best, a Federal Housing Administration (FHA loan) and a Veterans Affairs (VA) loan.
Type of Loan
|Down Payment %||Credit Score|
|VA||N/A (No Down Payment)||620 (sometimes as low as 580)|
Each of these mortgage programs also permit you to use gift funds for the down payment—even up to 100%.
However, the donor is required to submit documentation on the origin of the gift, and a letter confirming that they will not be reimbursed or repaid for the gift funds.
Federal Housing Administration (FHA) loans
The Federal Housing Administration was established by President Franklin Delano Roosevelt in 1934 to encourage American homeownership.
FHA Loans were designed as an alternative to conventional loans—unlike the latter, FHA loans don’t require strong credit, high income, or a large down payment.
The FHA isn’t actually the entity that makes the loan. Instead, it insures it, and a bank underwrites the loan (which must meet FHA standards).
The FHA guarantees protection for the bank against loss if the borrower defaults on the loan.
The properties eligible for FHA loans are single- and multi-family homes (the latter is 2-4 units).
A buyer’s record that includes a bankruptcy, short sale, or foreclosure on a property the borrower formerly owned doesn’t automatically disqualify that FHA-loan applicant—if the homebuyer is part of the FHA’s “Back to Work” program.
That program was specifically created to give a second chance to those in turnaround mode who want to be homeowners again.
However, depending on what the issue specifically is, the applicant will have to wait between 24–36 months after a bankruptcy, short sale, or foreclosure to be able to apply for an FHA loan.
You can use an FHA loan to finance up to 96.5% of your home-purchase price. In comparison, a conventional mortgage only finances 80-90% of the purchase price.
FHA loans also allow for a higher debt-to-income ratio than conventional loans. Such mortgages can also be a fixed rate or ARM (adjustable-rate mortgage).
VA + Good Neighbor Next Door (Soldiers + Public Servants)
A VA loan is available to members of the U.S. military and surviving spouses.
It accommodates high debt-to-income ratios and doesn’t require PMI (private mortgage insurance—mandatory insurance those who can’t do a 20% down payment must pay, monthly, for the life of the loan. In the future, some loans proved an opportunity for you to eliminate the PMI, which can add up).
In fact, as detailed in the earlier chart, the VA loan also gives an option for no down payment.
If you’re a veteran or a Gold Star spouse, this is the first loan you should consider applying for—it’s offers advantageous terms to those who served or their spouses that is superior to an FHA loan.
You must either be on active duty or honorably discharged and served in the reserves for at least six years—or had a husband or wife killed in the line of duty.
Like an FHA loan, neither a high debt-to-income ratio or a bankruptcy would automatically disqualify you from applying.
Good Neighbor Next Door is a mortgage program from Department of Housing and Urban Development (HUD) that gives teachers, police officers, and firefighters 50% off HUD-owned properties with a $100 down payment. (More on HUD homes later.)
This assistance program was developed to help teacher and officers become homeowners.
Similar to the VA loan, the Good Neighbor Next Door mortgage loan offers beneficial lending terms to those who serve—in this case, firefighters, police officers, and EMTs.
In exchange for living in the home you purchased for three years, the loan can reduce the cost of your home’s list price by a whopping 50%! Note that the home you purchase must be your sole residence for that three-year period.
Fannie Mae + Freddie Mac Options
HUD and other organizations, have additional options for lower-income homebuyers. These include:
Fannie Mae ReadyBuyer™ HomePath Mortgage
Considered innovative, the HomePath program considers the income of every working member of a household as part of the mortgage-application process—without having the names of those household memberson the mortgage.
There’s a highly affordable 3% down payment, and buyers can purchase any HUD home featured on the HUD HomeStore website. There is a compulsory homebuyer course that costs $75—the price of which is rolled into your closing costs. Learn more here.
Fannie Mae HomeReady
An FHA loan is considered the gold standard for an affordable mortgage that extends the homeownership net to more people at different socioeconomic levels.
Fannie Mae’s HomeReady mortgage does not fit the low-credit-score parameter (they’re looking for 680 and above), but if you qualify, you could get up to 97% of your home cost financed.
Since the down payment is under 20%, you would have to pay for PMI.
However, unlike an FHA loan, there’s an opportunity to cancel your PMI under that loan; to do so for an FHA, you would have to refinance. Learn more.
Freddie Mac’s Home Possible Program
This Freddie Mac loan offers a 3-5% down payment option. It was specifically designed to serve low-to-moderate homebuyers living in “underserved” communities.
Even if one or more of the lenders does not have a high-enough credit score, that score can still be factored into the loan process—counting for 30% of the total qualifying income.
Conventional Loan 97 N.B.
The Conventional Loan 97 N.B. offers a 3% down payment. Both Fannie Mae and Freddie Mac offer this loan, and it can save you .5%, versus the FHA loan.
That half of a percentage point difference is highly significant over time. You can also use gift money for the whole down payment—but the gifter has to be a relative (brides and husbands to be also fall under this umbrella).
The loan must be for a single-unit dwelling that costs under $424,100, and the mortgage must be fixed rate.
Like Fannie Mae’s HomeReady, consider this mortgage to be aspirational, because the credit-score range is similar to that of a conventional loan.
Homebuyer Grants and Down Payment Assistance
HUD offers homebuyer grants and down payment assistance for low-income and first-time homebuyers. Click to learn what they provide in New York.
Also do a Google search for similar assistance at the local and county level in your area.
While changes to the FHA program in 2008 no longer allows for down payment assistance from nonprofits (e.g., the Nehemiah Program), local nonprofits might be able to help you in other ways, including homeownership preparation classes, free counseling, or assistance with renovation.
Check the website Neighborworks for local leads: http://www.neighborworks.org/ They can also help you find a homebuying counselor. Here are some additional links of interest on their site:
Low-income applicants or those in public housing may be eligible for HUD’s Homeownership Voucher Program to help you meet your mortgage payment each month and other home-related expenses.
It can also provide subsidies for your home purchase.
Visit the HUD website to see if you’re eligible. Your local Public Housing Agency (PHA) can provide information as well.
Additional Options and Resource
HUD Homes Because HUD oversees the FHA loan program, when a homeowner defaults, HUD becomes the property owners. These are called HUD homes. Click for details.
HUD Housing Counselors HUD also offers housing counselors—for a small fee.
They can help you navigate all your homebuying options—at the local, state, and federal levels.
They can also help you with budgeting. HUD also provides some services for free like counseling on the HUD website.
Habitat for Humanity Habitat for Humanity doesn’t readily come to mind when thinking of New York—or of home buying.
The organization can help with home ownership by building houses, utilizing volunteer manpower and (often) donated supplies.
Homebuyers who get into the program will receive a mortgage through Habitat for Humanity that is down payment-, closing-cost, and interest free. Eligibility involves volunteer hours and a financial-management course.
Here are several links on their site where you can get more information:
Your local community development corporation
Last, but not least, look into any local Community Development Corporations (CDCs).
To find one near you, Google your borough or neighborhood and “community development corporation.”
For instance here is the Harlem Community Development Corporation’s site: https://esd.ny.gov/harlem-community-development-corporation
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