Many potential home buyers wonder how much they will have to save to get a mortgage. But did you know that it is possible to buy a home without a down payment?
Hide 1 Buying a Home with No Down Payment 2 USDA Loans 3 VA Loans 4 Other Options for a Low-Cost Mortgage 4.1 Conventional Loans 4.2 FHA Loans 5 Mortgage Options for People with Bad Credit 5.1 FHA Loans 5.2 Boost Your Credit Score
Buy a house without a down payment
As the name implies, a Zero-Down mortgage is a home loan that can be obtained without a down payment. A down payment is the first payment you make on the home and is due when you close on your mortgage loan. Lenders generally calculate your down payment as a percentage of the total amount you borrow.
For exampleIf you buy a home for $ 200,000 and have a 20% down payment, you will have $ 40,000 on the table at closing. Lenders require a down payment because it reduces the risk that you will not pay your bills. Down payments are a major hurdle for many home buyers, as it can take years to save for a lump sum of cash.
You can only get a mortgage with no down payment if you get a government-backed loan. Government-backed loans are insured by the federal government. In other words, the government (not your lender) pays the bill if you stop paying your mortgage.
The government offers secured loans to people who need financial help to buy a home.. This means that government-backed loans are less risky for the lender and can broaden their usual lending criteria to people with riskier financial profiles, such as no-down payment borrowers.
There are currently two types of government-sponsored loans that allow you to buy a home without making a down payment:
- USDA Loans
- Veterans Administration Loans.
Each loan has a very specific set of criteria that you must meet to qualify for a zero down payment mortgage.
You may want to get a government-backed FHA loan or conventional mortgage if you find that you do not qualify for a USDA loan or VA loan. Both options will allow you to make a low down payment.
A USDA loan is a loan backed by the United States Department of Agriculture.. The government offers USDA loans to promote development in rural and suburban areas. To encourage people to move to more rural areas, you can get a USDA loan with a $ 0 down payment. USDA loans also have lower fees than other types of loans.
Both you and your home must meet some criteria to qualify for a USDA loan. First, your home must be in a rural or suburban area. Check the USDA map of eligible areas to see if your home qualifies. On this map, anywhere outside of an orange zone qualifies as a rural area. Also, your home cannot be a working farm, it must be a single-family unit, and you must live in the home as your primary residence.
You must also meet some financial requirements to qualify. Your combined gross household income cannot be more than 115% of the median income for the county in which your home is located. Your debt-to-income ratio must not exceed 45% and you must have a FICO® Score of at least 640.
You may qualify for a VA loan if you are an active duty member, a member of the National Guard, a veteran, or the spouse of a deceased veteran. VA loans are backed by the Department of Veterans Affairs and are another option if you want to buy a home with no down payment. VA loans also allow you to pay a one-time VA financing installment that is 2.15% of the value of your loan in lieu of mortgage insurance.
To qualify for a VA loan, you must meet any of the following service requirements:
- Serve 90 consecutive days of active duty during the war
- He served 181 consecutive days of active duty in peacetime
- He served for more than 6 years in the National Guard or in the Reserve.
- Be the spouse of a service member who has died in the line of duty or from a service-connected disability
In addition to service requirements, you must have a credit score of at least 640 to obtain a VA loan.
Other options for a low-cost mortgage
What if you don’t qualify for a USDA or VA loan?
There are still a few ways to buy a home without spending years saving for a down payment.
Many people believe that if they want to get a conventional loan, they need a 20% down payment. This is not really true. Depending on your lender, you can get a loan with as little as a 3% down payment. The confusion stems from the requirement for private mortgage insurance (PMI).
Your lender will require you to pay PMI as a condition of your loan if your down payment is less than 20% of the loan amount. PMI is a type of insurance that protects your lender if you stop making your loan payments. Regardless of the fact that you are the one paying it, PMI does not offer any benefits. As a result, most people want to cancel the PMI as soon as possible. You can contact your lender and request that they cancel your PMI plan as soon as you reach 20% equity in your home.
You may also consider a Freddie Mac Home Possible® if you have low or moderate income compared to others in your area. Home Possible® loans allow you to buy a home with a 3% down payment and lower mortgage insurance options. To qualify, you cannot earn more than 100% of your area median income. Unlike USDA loans, this stipulation only applies to parts of the loan, not to your entire family.
The FHA loans, which can be obtained with as little as 3.5% in advance, are backed by the Federal Housing Administration and are loans for people with low or moderate incomes. FHA loans have fewer requirements than the USDA and VA. For these loans, you must plan to live in the property you are buying as your primary residence, purchase a home that meets habitability standards, and move within 60 days of closing.
It is important to note that you will have to pay the mortgage insurance for the life of the loan if you have a down payment of less than 10%. Some people get an FHA loan, wait until they accumulate 20% equity in their property, and then refinance to a conventional loan as an alternative solution. This eliminates the requirement for lifetime mortgage insurance.
Mortgage Options for People with Bad Credit Records
Credit plays a very important role in your ability to get a mortgage. Here are two solutions if you care more about your credit score than your down payment:
FHA loans aren’t just for people with a low down payment. They are also a viable option if you have a low credit score. All you need is a 580 credit score to get an FHA loan combined with a low down payment. However, you will have to make up for it with a larger down payment if your credit score is less than 580. You may be able to get a loan with a credit score as low as 500 points if you can bring a 10% down payment for closing. The minimum credit score with Rocket Mortgage® is 580.
Increase credit score
You will have to increase your credit score if your score is below 500 or you do not qualify for an FHA loan. Even if you can get a loan right now, there are many benefits to applying for a loan with a higher score. A higher credit score gives you more lender options and access to lower interest rates. An interest rate that is only a fraction of a percentage point lower can save you thousands of dollars over the life of the loan, so investing in your score is worth it.
Tips to improve your credit score:
- Pay off your outstanding debt.
- Reduce the amount of money you put on your credit card each month.
- Always make your credit card and loan payments on time.
- Take out a small personal loan and pay it back.
Apply for a secured credit card, which is a credit card that requires a deposit that you will have to pay in full.
- Eliminate any mistakes on your credit report.
Wait patiently as your accounts age and become more attractive to lenders.
Information source: https://www.rocketmortgage.com