Does a zero down home loan seem out of reach for you? Do you worry that your credit score isn’t high enough to qualify for it?
We have good news for you. You don’t need exceptional credit to score one of the no money down home loans. Many of the zero down payment home loans also have flexible underwriting guidelines, including low credit score requirements.
Eligibility for Zero Down Home Loans
Your two most basic zero down home loans are the USDA and VA loans. Both loans have specific eligibility requirements. Once you know you are eligible for the program, qualifying is the easier part. Here’s how to tell if you are eligible:
- USDA loans – The USDA offers 100% loans for borrowers buying in rural areas. You can determine if the area you plan to purchase a home is rural on this map. You also have to make sure you meet the income requirements. In this case, you can make too much money and not qualify for the loan. The USDA loans are for borrowers that have a total household income that is less than 115% of the area’s average median income.
- VA loans – The VA also offers 100% financing, but to veterans. Not just any veteran qualifies, though. You have to have enough time served in order to qualify. Veterans serving during peacetime must serve 181 days. Veterans serving during wartime must serve 90 consecutive days. In addition, you must have an honorable discharge in order to be eligible.
Qualifying for Zero Down Home Loans
Once you know you are eligible, you have to qualify for the loan. As we stated above, both loan programs have flexible guidelines.
- USDA loans – The USDA requires a 640 credit score. That’s not ‘stellar’ by any means. Basically, the USDA requires that you have timely payments for the last year and don’t have any outstanding collections or judgments. The USDA also requires a maximum 29% housing ratio and 41% total debt ratio. In addition, they require stable employment and income over the last two years.
- VA loans – The VA requires a 620 credit score, which is even lower than the USDA requires. Again, your credit history should be ‘decent.’ You shouldn’t have any recent defaults, collections, or judgments. The VA doesn’t set a maximum debt ratio, but they tend to prefer total debt ratios lower than 43%. An area the VA does focus on is your disposable income. They want you to have enough money each month that allows you to live comfortably without having to sacrifice. The VA also requires stable employment and income over the last two years.
If you won’t be buying a home in a rural area and you aren’t a veteran, you may have other options for a no down payment loan. You may have to look at subprime lenders, otherwise known as alternative lenders, though.
These lenders offer loans that they keep in their own portfolio; they don’t sell them to a secondary market. This allows the lenders to make their own rules. They may allow lower credit scores, higher debt ratios, or alternative ways to verify your income.
No matter which loan program you choose, though, you will always have to verify your income in some manner. The new mortgage guidelines stipulate that lenders must be able to determine beyond a reasonable doubt that a borrower can afford the loan. This doesn’t mean they have to verify your income the standard way, but they have to prove that they verified your cash flow in some manner.
The truth of the matter is that you can get a no down payment home loan even if you don’t have stellar credit. But, the higher your credit score is, the better your chances of securing a lower interest rate and/or lower closing costs. It works to your advantage to have the higher credit score and get the best terms on your loan.