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.
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:
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.
For example, if the median income for an area is $40,000 and the borrowers make less than that amount each year the borrowers may be considered low income in some states or locales. However, some lenders, states and loan programs may set the “low income” threshold above or even below that median income level.
Low income loans are designed to address a particular segment of society that may need additional assistance to qualify for traditional financing. By helping those with lower income acquire real estate or to start a business, borrowers may soon find themselves rising above poverty levels and help to secure a more solid financial future.
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