Comparing the Benefits and Pitfalls of Low Income Home Loans

Low income home loans are extended to individuals who are credit worthy but earn slightly lower than average incomes required for a mortgage. Lenders cater these loans to the needs of low-income individuals and families. However, they also protect themselves against default with key restrictions on the loan options. As a result, achieving a low-income loan involves compromises in order to gain home ownership.

How Income Affects Mortgage

Having a low income and being credit worthy are two different things. Low income people can achieve loans if they have a good performance record on previous loans. This is measured by a credit score and a debt to income ratio. A credit score is just a numerical expression of overall performance on debt. The debt to income ratio is a comparison of the amount of debt a person has to his or her income. Even for a low income individual, a debt to income ratio can be low. The primary difference with a low-income loan is the loan limit. A low-income individual cannot make as large a down payment or monthly payment, so he or she will have to take a smaller loan.

Benefits of Low Income Loans

The main benefit of a loan income home loan is the fact it allows a person to begin owning and stop renting. For a low-income person, ownership of equity is extremely important. This provides an individual security that is not offered from a low-income job. Low-income jobs are more likely to be lost, particularly if they are blue collar jobs. Losing a job can bring a flood of financial woes. Since low-income individuals are less likely to have large savings and investments, equity can be protection against bankruptcy in this situation. Low-income loans offer low down payments and manageable monthly payments.

Downsides of Low Income Loans

The primary disadvantage of a low-income loan is the limitation on its size. If a person only qualifies for a $100,000 loan, there are very few quality homes available for purchase. That means the individual will have to come up with a larger down payment. It is common for a low-income person to seek a separate loan for the down payment. This can eliminate the benefit of a low monthly payment on the primary mortgage. The borrower will have to pay both debts each month, and it can be too much to take on. Further, the terms of low-income home loans tend to be very strict, not offering options for refinancing and modification.

Electing a Low Income Loan

If you qualify for a low-income loan due to your salary level, you can ease the burden by seeking grants from local agencies. You may also consider an FHA secured loan, which is available to individuals with good credit despite low income. This type of loan will have lower penalties if you need to modify and will also offer a fixed rate throughout the life of the loan.

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