Finding 100% financing no matter your credit score is not the easiest task in today’s lending terms. Mortgage lenders are more cautious when it comes to providing mortgages to those with poor credit. That being said, there are two programs that do allow zero down payment: the USDA loan and the VA loan. Both of these loans have strict requirements regarding who can apply for them, though. If you do not fit the requirements of either of these loans, there is one more trick – the FHA loan. While the FHA loan does require a down payment, there are ways around it, enabling you to secure a home loan with no down payment.
USDA Loans are a no Down Payment Loan
USDA loans offer you the ability to purchase a home with zero down payment. The kicker, however, is that you have to purchase a home within the rural boundaries that the USDA sets as well as have low to moderate income. The USDA determines the maximum amount of income any household can make in any given area based on the average median income for the area.
Granted, there are allowances that you can take advantage of if you have children (whether minors or grown and attending school); disabled relatives living with you; or elderly relatives living with you. This helps your income decrease, enabling you to qualify for the program if you are on the cusp of the income guidelines.
Technically, the cutoff for the USDA loan is a 640 credit score, but that does not mean that you are ineligible if your score is lower than that. It simply means that your file would have to be manually underwritten. Sometimes this is the better option, though, because it allows you to have a human being looking over your file and deciding what type of risk you pose for the bank and the USDA. If you are able to find a home that is considered rural, this is a great loan program to use even with low credit scores.
VA Loans Also Offer no Down Payment
If you are a veteran or are actively serving in the military, you might be eligible to receive a VA loan, which is another no down payment loan. This loan pays much less emphasis on the credit score than any other loan does. This is because the VA focuses on the disposable income that you have, rather than the credit score.
Of course, if you have major blemishes on your credit report, the lender and the VA are going to think twice about providing you with a new loan, but if your credit history is fairly clean for the last 12 months, but your score is still low, they will usually look beyond that. What they want to see is a minimum amount of disposable income each month, based on where you live.
Every county has a different minimum amount they must have left over every month after the necessary expenses are paid. If the disposable income amount is not reached, the loan cannot be approved. Of course, you also have to have the entitlement to VA benefits, which is achieved by serving in the military or the reserves.
Last, but not least is the possibility of the FHA loan. Technically, FHA loans require a 3.5% down payment. If your credit score is below 580, you even have to put down 10% on the home you purchase. But, you can get around that requirement because the FHA does not require any of the funds to come from you for the down payment. This is a unique factor for this loan as every other loan requires your own funds for the down payment.
Because of that, you can receive 100% of the down payment money from relatives, your employer, close friends that can document their interest in you, and charitable grants. If you are able to secure the down payment money from someone, you can apply for the FHA loan and technically make no down payment. You will have to meet the other requirements of this loan, including:
- 31/43 debt ratios
- Good housing history for the last 12 months (no late payments)
- Stable employment
- Stable income
- No active collections or judgments
The FHA loan offers flexible terms and low-interest rates, helping you to obtain an affordable mortgage payment with this government program.
There are many options for you to obtain a mortgage even if you have low credit and no money to put down on a home. You have to be creative in the way you approach the loan, whether that means shopping for a home in a rural area or asking family or your employer for down payment money.
Whatever the case may be for you, talk to various lenders to see your different options before you give up your dream of becoming a homeowner.