Think You Can't Afford to Buy a Home? Community Lending Programs May Be What You Need

Borrowers who fail to qualify for traditional home loans, like conventional or FHA products, may be looking for alternative paths to financing a new home. Fortunately, the Department of Housing and Urban Development (HUD) has created a series of programs to help people follow their dream of homeownership, especially in underserved communities where buying a home may have been pushed too far out of reach by a lack of job opportunities, low and stagnant wages, and systemic racism.

Enter community lending programs. These government-backed financing options may be the answer some people are looking for as they try to find a clear path to purchasing a property. However, taking advantage of these types of lending options isn't always easy, and not all borrowers will qualify. Here's what you need to know if you're considering a HUD-backed community lending option.

Before you can decide if a community lending program is right for you, you'll need to understand what they are. "HUD community lending programs help low- and moderate-income households to obtain affordable mortgages," Leonard Ang, CEO of iPropertyManagement, an online resource guide for landlords, tenants, and real estate investors, tells Hunker. He explains that these programs are designed to help find financing for first-time homebuyers, marginalized communities, borrowers with limited resources, and other individuals who may not qualify for traditional mortgages.

HUD has a variety of versions of these programs, with some of them being more about helping to inspire economic growth in certain areas (like the Community Development Block Grant Program) and others that funnel funds directly to organizations that want to help borrowers land a home of their own (like the HOME Investment Partnerships Program, which partners with state and local jurisdictions, and HUD's Office of Community Planning and Development).

Some of the more direct programs that individual homebuyers can take advantage of are run by Fannie Mae and processed by individual lenders at a more consumer-facing level. These programs can help members of the public take advantage of that high-level financing and purchase a home in situations where they wouldn't otherwise be able to do so.

To qualify for these HUD programs, applicants must meet certain criteria, such as having an acceptable credit score, a sufficient down payment, and adequate savings, according to Ang. Those who do manage to meet the guidelines are likely to see major benefits from doing so. "Borrowers can take advantage of favorable loan terms, including lower interest rates, discounted closing costs, and favorable repayment periods."

Andrew J. Leavitt, VP, Cap Markets/loan officer with Pinnacle Lending Group, Inc., adds that there are some other qualifying conditions that may prevent many people from being able to take advantage, like income restrictions. Borrowers can't make more than 80 percent of the median income for your census tract.

For example, if you live in Allentown, Pennsylvania, where the median income level is $94,300, you wouldn't be able to earn more than $75,400 per year. Leavitt says all states are required to follow Fannie Mae's government-sponsored enterprise (GSE) guidance when it comes time to make these determinations.

Even with those tighter income guidelines, Fannie Mae offers a bit more flexibility with things like late payments, collections, or other derogatory credit items, making it all worthwhile.

People who purchase homes with options like HUD's HOME program, one type of community lending option, will save more money than pursuing FHA programs alone, like the ability to get lower mortgage insurance, which is an extra fee tacked onto the mortgage payment (for FHA loans, this lasts for the life of the loan). "What most borrowers don't know is that if your credit score is 635, the mortgage insurance cost per month is incredibly higher than a person that has a credit score of 720," Leavitt says. "When I say higher, I'm [talking about] hundreds of dollars per month."

Some of the other pros of going with this type of financing is that lenders will be more willing to work with borrowers on things that may have gotten their loan denied by other banks or brokers. "The other benefits to it also come along with more flexibility with guidelines, especially if you have late payments, collection, or other negative remarks on there," Leavitt continues.

Ang says that since FHA mortgage insurance is still required on these types of loans, lenders are able to offer "more generous contributions" when it comes to down payments and closing costs. "Borrowers also benefit from repayment plans tailored to their individual needs without incurring prepayment penalties."

Shopping for a home with a community lending program may look different than shopping without one. Leavitt says you'll need to make contact with a lender who specializes in this type of program before getting started. From there, you'll need to discuss certain qualification concerns to set expectations about shopping. For instance, some programs will have geographical restrictions as to where you can even purchase a new property to make sure that underserved communities are getting an equal opportunity to obtain financing.

You may also need to attend a class before you can be eligible for financing, and sometimes, this class may come at a cost (although Leavitt notes that some places will offer classes for free or at a heavily discounted rate).

If this sounds like the perfect lending option for you or someone you know, you may want to find a local lender who participates in these types of programs. The best way to do this is to visit the HUD website and select your search criteria to find a lender near you.

You can also reach out to your local bank or credit union to find out if it offers any of these HUD programs. Just like any other time you work with a lender, you should do your due diligence and work to set expectations so that you'll both come out of the transaction feeling happy.