Understanding Home Loans

You may need help qualifying for a home loan if you have poor credit or a low level of income.

Fortunately, there are many home loan programs offered at a local, state and federal level to help you get on your feet and become a homeowner. The Federal Housing Administration (FHA) offers a variety of home loan opportunities, many of which may work for you even if you have a low credit score.

There are also public housing ownership opportunities, Indian home loans and veteran home loans. If you qualify for one or more of these programs, you may be able to greatly improve your lifestyle.

What are VA home loans?

Veteran home loans are loans backed by the Veteran Affairs (VA) program. This means that the VA will guarantee some or all of the payment on a loan if a veteran unfortunately goes through foreclosure. However, the VA program will work with veterans to prevent foreclosure and require them to meet certain eligibility criteria.

These types of loans are important to the well-being of veterans and other military personnel, because they even the playing field in the housing market. Many people who have served are unable to qualify for loans without the help of these assistance programs.

The VA has other home loan programs as well which may help you with certain homeownership expenses. For example, they offer Specific Adapted Housing (SAH) and Special Housing Adaptation (SHA) grants.

These may pay for the installation of disability accommodations in your existing home or a new home that already has these accommodations installed. In effect, you may be able to dramatically improve your quality of life and live independently. To qualify for an SAH or SHA grant, you must be permanently disabled due to a service-related injury.

The VA also allows spouses of veterans or military members to claim loan eligibility if their husband or wife passed away from a service-related injury. There are also loan technicians and financial counselors available to help guide qualifying applicants on their loan opportunities.

Finally, there is a veteran’s mortgage life insurance program which is easy to apply for a certificate of eligibility (COE). Each of these programs is structured so that veterans and active service members have better chances at becoming successful homeowners.

What to Know About FHA Loans

An FHA loan is similar to a VA loan because it involves a government program’s insurance of an applicant’s loan so that he or she has a better chance at qualifying for a mortgage. Generally, applicants go to the FHA program when they have been denied acceptance for other loans.

Once approved by the program, the FHA will guarantee the insurance of a third-party loan from an approved lender. A lender is more likely to approve an applicant with bad credit for a low-interest, low down payment loan, because they know the FHA will pay for the house in the event of a foreclosure.

In a traditional loan, a borrower may be required to make a down payment as high as 20 percent of the purchase price. A down payment is the amount of money a buyer typically pays upfront in order to secure the home. This is extremely difficult for many families to afford, especially if they have low incomes and take care of children.

FHA loans, on the other hand, may allow borrowers to make down payments between 3.5 and 10 percent. Though an applicant may make more payments over the life of the loan, they will be able to afford the initial down payment.

Why are FHA loans beneficial?

The FHA loan program provides low-income families with an alternative route in comparison with conventional loans. Conventional loans are often only given to families who have high incomes and excellent credit scores, making it difficult for other U.S. citizens to break into the housing market.

In contrast, an applicant may qualify for an FHA loan with a credit score as low as 500. His or her down payment will then be around 10 percent of the purchasing price. If a potential buyer has a score of 580 or higher, he or she may be eligible for a 3.5 percent down payment. Thus, the program incentivizes its applicants to improve their credit scores and helps them get on the right track.

The FHA also has programs that incentivize home buyers to make their houses more energy efficient. If an owner applies for an FHA Energy-Efficient mortgage, he or she may use the loan to pay for home appliances and improvements that reduce their energy usage.

Generally, this process requires the applicant to get recommendations from an energy assessor. Qualifying improvements include energy-saving equipment such as solar panels and other solar technology.

What is the Indian Home Loan Guarantee program?

The Indian Home Loan Guarantee Program, sometimes referred to as Section 184, aims to help American Indians, Alaska Native families, Alaska villages and other specific tribes qualify for mortgages.

Eligible applicants may be entitled to loans with varying limits. These limits change depending on the county in which the applicant lives. Applicants may only use these loans for one of the following reasons:

  • Buy an existing house
  • Build a new house
  • Buy and renovate a house
  • Refinance an existing house

This program has expanded since it was established by the Housing and Urban Development (HUD) program in 1992. This means that it now covers areas beyond the standard tribal trust lands. However, certain states do not yet offer Section 184 loans.

What is Public Housing Ownership?

You may consider applying for the Public Housing Ownership program, also known as Section 32, if you want to purchase a housing unit and are part of a low-income family. This organization is a government assistance program that may help you purchase a home at an affordable price through your local Public Housing Agency (PHA).

If a PHA profits from the sale of your home or the homes of other applicants, they may use the funds for one of the following purposes:

  • Establish a lease-purchase program
  • Sell public housing rental units to homebuyers
  • Provide monetary assistance to you and other low-income families

If they choose to use these funds for monetary assistance, you may receive benefits for a down payment, closing costs or subordinate mortgage. You may also use the funding to purchase or maintain a property that goes on sale.

To qualify for this program, your total income must usually be less than 80 percent of the average family income in your town. It is also important to understand your rights as a participant in the Public Housing Ownership program.

For instance, the PHA may sell a public housing unit that you are living in, but it must give you the opportunity to buy the house. The PHA must also notify you within 90 days of the unit’s sell-by date.