How to buy a house with no money down and bad credit.

How to Buy a House With No Money Down and Bad Credit

Buying a house takes 20% down and good credit, right? If you don’t have any of those, is buying a house out of the question? Not necessarily. There are ways around each of those requirements. We’ll take a look at how to buy a house is no money down and/or bad credit.

How to Buy a Home with No Money

Most people believe that you must have 20% of the purchase price to put down. That can be a huge amount of cash. The median home price in the US is $200,000. That means you need to have a downpayment of $40,000.

However, the 20% down is not a requirement. Some lenders may ask you to purchase Private Mortgage Insurance (PMI) in order to put down less. If you do not want to purchase PMI, some organizations can help you get a loan that is 100 percent financed.

Buying a House with Less than Perfect Credit

The first action a mortgage company will take is to pull your credit rating. In general, you need a FICO score between 580 and 620. FHA loans allow for a minimum score of 580 and may consider FICO scores between 500 and 579. USDA loans require a credit score of 640.

If you can make a down payment of 3.5% ($7,000 on a $200,000 mortgage), lenders will often consider a FICO of 580. If you can make a down payment of 10% ($20,000 on a $200,000 mortgage), lenders may consider a FICO between 500 and 579.

Is it possible to buy a house with no down payment and bad credit? Unfortunately, the answer is almost always no. Bad credit means you are a bad risk and after the subprime lending crisis in 2018, most companies won’t take the chance.

However, don’t despair. Check out some of these options and you may find an option. While you are researching mortgage companies and options, take some time to work on improving your credit rating and start saving toward a down payment.

Options for No Money Down and Less than Stellar Credit

FHA Loans – Federal Housing Authority loans have been helping home buyers get into homes since 1934. Since they are government-backed mortgages, FHA loans are more attractive to lenders and have lower requirements. You may need to purchase mortgage insurance in order to qualify. FHA loans do require a down payment, but they will accept both personal down payment gift and grants toward the down payment. However, there are more hoops for the seller to jump through to make sure the home qualifies for an FHA loan.

Current FHA Requirement:

Minimum Credit Score500
Down payment3.5%
Housing Ratio30%
Debt to Income Ratio41%
Mortgage Insurance1.25%
Interest RatesHigher than Conventional Loans
Mortgage Limits$417,000
Home Inspection GuidelinesStrict

Quicken Loans, Bank of America, Citibank – These companies offer options for home buyers including the ability to use gifts or grants as down payments and no PMI. These online companies can be good places to  look for zero down home loans

USDA Loans – The US Department of Agriculture offers no down payment mortgages to increase low income home ownership in rural areas. The minimum mortgage insurance requirement is 0.35%, lower than any other mortgage. Rural do not necessarily mean rural, but can be on the outskirts of cities.

Current USDA Requirements:

  • U.S. citizenship or permanent residency
  • Credit score of at least 640
  • Stable, dependable income
  • Generally 12 months of no late payments or collections
  • Adjusted household income is equal to or less than 115% of area median income
  • Property is primary residence and located in a qualified rural area

VA Loans – qualified service members and veterans should consider a VA loan. There is no mortgage insurance, but there is a one-time fee to help fund further loans. Qualified borrowers may be able to get a 0% loan.

VA loan requirements:

  • Active service for 90 consecutive days during wartime
  • Active service for 181 days during peacetime
  • Active member of the National Guard or Reserves for 6 years or more
  • Are married to a service member who died in the line of duty or as a result of a service-related disability
  • Must be for primary residence
  • FICO 620 or higher
  • Sufficient income and no heavy debt load

Navy Federal Credit Union – The Navy Federal CU offers great mortgages to first-time home buyer members. Some mortgages are zero-down and no PMI, making them great for those unable to save up the down payment.

As you can see, there are options for people with either no money to put down or bad credit. If you are in the position of having no money AND bad credit, it will be a lot harder to get a mortgage. If you are in that situation, what should you do?

Improving Credit

Your credit score reflects if you make payments on time, how long you’ve had credit, what types of credit you have and are using, how much debt you have, and how many hard inquiries you’ve had on your credit report.  It takes time to improve your credit rating, but it can be done. Just remember that the higher your credit score, the easier it is to get a mortgage with less down.

To improve your credit:

  • Make payments on-time
  • Get current on missed payments
  • Lower balances
  • Pay off debt
  • Don’t get new credit cards!
  • Check your credit report for errors – if you have an old collection or foreclosure, you may have to argue with all three credit reporting companies to get it removed

Conclusion

If you have experience with getting a mortgage with either zero-down or bad credit, let us know how you did it. We’d love to hear your story and tips to help others.

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