The phrase “low-income loan” is a label used for a broad array of financing programs designed for borrowers with personal income levels that are below certain measures. For example, some low-income loans are designed only for borrowers whose income has been determined to be below the median income for their area.
One of the most common types of low-income loans are FHA and some VA loans that are designed to help individuals afford a home purchase or mortgage loan refinance. While FHA and VA loans are considered non-conventional mortgage loans, other conventional loans also offer low-income programs, including programs guaranteed by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).
However, it’s not just mortgage loans that offer low-income options. In fact, the biggest low-income loan arena is arguably the student loan industry. With government support, students are able to obtain large amounts of guaranteed loans – with no current income. In addition, some personal loans are also geared for the low-income segment of the population.
Features of a low-income loan
Lenders want to be repaid for their loans, while avoiding loan defaults. So lenders and creditors typically analyze an applicant’s income to determine whether the borrower will be able to repay the loan. The debt-to-income (DTI) ratio used by many lenders is a popular barometer of a borrower’s loan payment ability, as well as a possible predictor of loan default risk.
Low-income loans help borrowers with lower income obtain the credit and financing they need for specific goals, from buying a house or obtaining an education. To serve low-income borrowers, these loan programs often employ one or more of the following loan features:
- Income qualification. One way to help borrowers with lower incomes qualify for a loan is to increase the DTI ratio requirement. For example, some lenders may limit their loan risk by requiring that only 25% of the borrower’s gross income be used to qualify for the loan amount. To accommodate lower income levels, lenders may increase that limit to 30% or even 40%.
- Loan amount. Some lenders have minimum loan amount requirements that are too high for some low-income borrowers. By lowering the minimum loan amount for a program, low-income borrowers may be able to qualify. For example, some mortgage lenders may set minimum loan amounts of $40, 000 on their loan programs. But some prospective and ready homebuyers may only be able to qualify for a $30, 000 loan, enough for a small bungalow, studio condominium or manufactured home in some locales. By lowering the minimum loan amount for their programs, these lenders may be able to assist low-income borrowers.
- Rates. Lower interest rates can help lower monthly payments, allowing those loans to be more affordable for borrowers with lower income.
- Terms. Even more than interest rate changes, an increase in the loan repayment or amortization term can really lower monthly payment amounts. By increasing a personal loan amortization schedule from one year to two years, the loan repayment can be stretched over a longer period, thereby reducing the monthly payment requirement.
- Guarantees. Because some of these low-income loan features can increase the lender’s risk exposure, many low-income loans often require additional guarantees. These guarantees sometimes involve a co-signer. In many cases, such as with FHA and VA loans, it is the federal government providing guarantees to the mortgage lender against certain losses.
- Direct assistance. Another way that the federal and many state governments help low-income borrowers is through direct assistance programs. For example, some programs will provide grants and down payment funds that low-income borrowers can use to lower the loan amount they need – and the monthly payments they’ll have to pay in the future.
Median income requirements
Many government-supported or guaranteed loans for low-income borrowers are often restricted to individuals with qualifying income levels. To qualify for these low-income loans, the borrower’s qualifying income is typically measured against the median income for that area.
To determine if a borrower falls into a low-income category, lenders often refer to statistics compiled by the Department of Housing and Urban Development, or HUD. HUD has surveyed metropolitan and non-metropolitan areas of the country to determine the median gross income for each area.
Those median income levels are then used to determine low-income qualifications. But various programs, state governments and lenders may use those median income numbers differently.
A land bank is a bank that issues long-term loans on real estate in return for mortgages. This term could also apply to:
In the United States, the Agricultural Credit Association (ACA) is an institution of the Farm Credit System that has direct lending authority to make short-, intermediate-, and long-term loans to agricultural producers, rural homeowners and some farm-related businesses.
Example: AgStar Financial Services
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