How to Buy a House With No Money Down and Bad Credit
For most people, a home is the most expensive thing they’ll ever buy. However, buying a home can feel out of reach for many people, especially those without savings or with bad credit.
The hard truth is that there isn’t really a way to buy a house with bad credit AND no money down. However, if you have good credit but limited savings or vice versa, there may be options out there that can help you buy a house.
Let’s look at bad credit and what you can do about it first and then cover some ‘no money down’ home mortgage options.
What Do Mortgage Lenders Consider a Bad Credit Score?
Credit scores can range from as low as 300 to as high as 850. Each lender has its own standards for determining who to lend to, but most lenders generally use similar ranges when considering a potential borrower’s score.
Experian, one of the major credit bureaus in the US, explains that the credit score ranges are:
- 300 – 579: Poor
- 580 – 669: Fair
- 670 – 739: Good
- 740 – 799: Very Good
- 800 – 850: Exceptional
Most lenders want to see borrowers with a good score or better, though some programs are designed for borrowers who have only fair credit. For example, borrowers can get an FHA loan with a 3.5% down payment as long as their credit score is 580 or better.
It’s important to remember that these ranges are rough estimates and that each FHA lender is free to add additional FHA mortgage requirements.
Can You Buy a House with Bad Credit?
Yes, it’s possible to buy a house with bad credit, but that doesn’t mean that it will be cheap.
Some programs, such as FHA loans, can make it easier to buy a home with poor credit. However, if you have particularly poor credit (less than a 580), you’ll have to make a larger down payment.
An FHA loan for people with scores below 580 requires a minimum down payment of 10%, much higher than the 3.5% required for those with better credit scores. Requirements for a conventional loan are even more stringent.
On top of the down payment requirements, getting a mortgage with a poor credit score means accepting a much higher interest rate. The interest rate of your loan impacts both your monthly payment and the overall cost of the loan.
For example, if you get a $200,000 30-year mortgage to buy a home at an interest rate of 3%, your monthly payment will be $843. Over the 30-year loan, you’ll pay a total of $303,555.
The same loan with a 5% interest rate will cost $1,074 per month and $386,512 overall, that’s an increase of roughly 27%. Worse scores can lead to even higher rates.
Here’s a detailed overview of How to Buy a House with Bad Credit.
If you’re willing to wait just a bit before you buy your home, you can improve your odds of getting a loan and likely get a lower interest rate by building or repairing your credit before applying for a home loan.
If you have the patience, building a positive credit profile using accounts that build credit is a great way to improve your odds of obtaining favorable home financing options.
If you are currently renting, unfortunately paying your rent on time does not help you build credit, but not paying your rent may harm your credit profile.
How Credit Strong Can Help You Increase Your Credit Score
One of the accounts that can help you build your credit is a Credit Strong account. A Credit Strong account can help you boost your credit score, making it easier for you to meet a lender’s minimum credit score requirement. The company offers installment loans to build credit and help you build your savings.
With a Credit Strong credit builder loan, you pay between $15 per month and $110 per month on the loan. Credit Strong will put the money aside in a locked savings account for you. You won’t be able to access that money at the time you get the loan.
Each month Credit Strong will send you a bill for your monthly loan payment. As you pay the monthly payment of principal and interest, Credit Strong reports those payments to the credit bureaus. With each monthly payment you make, you’ll build up the payment history on your credit report and the principal portion of your payment will increase your savings.
You can also choose a long-term payment plan, letting you add to your length of credit history.
When you finish your payment plan, Credit Strong will release the money in the savings account to you. This makes Credit Strong’s credit builder account a sort of savings plan that helps you build credit at the same time.
You can see credit builder loan plans and pricing here.
No Money Down Options
One of the greatest roadblocks on the path to homeownership for most people is the need to make a large down payment. Conventional wisdom has often suggested that a homebuyer should make a 20% down payment to avoid private mortgage insurance.
Even a 3.5% down payment, the minimum required by an FHA loan, can be expensive as homes in major cities can often go for $500,000, $750,000, or more.
Most people who have student loan debt and other bills to pay, struggle to save the money needed to make a down payment in these cities. And that is still ignoring closing costs and maintenance on your new home.
For homebuyers who don’t have the savings to make a large down payment, there are some no money down loan options. However, keep in mind that many of these loans still include closing costs, which can be a significant upfront expense.
Federal Housing Administration loans have one of the lowest credit requirements. The minimum score they’ll accept is a 500, but not without plenty to make up for it on the back end.
While FHA loans are ideal for first-time homebuyers, they’re restrictive when it comes to borrowers with lower credit.
With an FHA loan, you should prepare to:
- Put at least 10% down with a score below 580
- Demonstrate consistent employment history for at least two years
- Pay for Private Mortgage Insurance or PMI in your monthly payments
- Only work with an FHA approved lender
The upside is they only require 3.5% down payments for borrowers who have reached at least a 580.
If you live outside of a city in a rural area, a USDA loan might be a great option for you. A USDA loan is a loan program that doesn’t require a down payment. The program is administered by the US Department of Agriculture (USDA) and is primarily targeted at rural homebuyers who otherwise could not afford to purchase a home.
The USDA loan program guarantees loans offered by local lenders to certain applicants. To be eligible for a USDA loan, you need to meet these requirements:
- Be a citizen or permanent resident of the US
- Apply for a loan amount that requires payments of less than 29% of your monthly income.
- Other monthly debt payments you make cannot exceed 41% of your gross monthly income.
- You can often get a loan with a higher debt-to-income ratio if your credit score is over 680
- A history of dependable income over the past two years
- Acceptable credit over the past year, with no accounts placed in collections. You may be able to appeal to get around this requirement if you have extenuating circumstances.
If you have trouble making your payments, there is also payment assistance available in some situations.
USDA loans are primarily available in rural areas, though some suburbs may qualify as well. You won’t be able to use the program if you plan to buy a home in the city.
If you or a loved one have served the nation as a member of the military, you may be eligible for a VA home loan. Veterans Affairs administers a mortgage program that gives service members and veterans the opportunity to apply for a special mortgage called a VA loan.
There are different types of VA Loans, but each is backed by the federal government, making them a lower risk for lenders. The VA also has some payment assistance programs, further reducing lenders’ risk.
To qualify for a VA loan, you must meet one of these requirements:
- Served 181 days of active service during peace.
- During war, served at least 90 consecutive days of active service
- Be in the National Guard or Reserves for more than 6 years
- Be a spouse of a military member who died in the line of duty or as a result of a disability related to their service.
The VA allows borrowers to get a home with no money down, though it’s up to lenders whether they’re willing to offer such loans. Typically, no money down loans involve higher interest rates and fees.
A physician loan is a special type of mortgage designed for doctors. Doctors typically have large debts after graduating from medical school and may not have the savings to make a down payment.
However, doctors are also typically highly compensated, meaning they can handle a mortgage payment in addition to other loan payments.
With a physician loan, you can avoid making a down payment and still not have to pay for private mortgage insurance (PMI).
To qualify for a physician loan, you need to have graduated from medical school with an M.D. or a D.O. Some lenders include dentists, orthodontists, and veterinarians in the program as well.
You can only use a physician loan to purchase a primary residence. That means you can’t use it to buy a rental property. Beyond that, there are otherwise few restrictions on the type of home you can buy.
Is a No-Down-Payment Mortgage Right For You?
No down payment mortgage options can be useful in a few situations, but there are a lot of drawbacks to worry about.
A no down payment loan, like a physician loan, makes sense for a borrower who has a significant income and wants to buy a home.
If you’re a new doctor making $200,000 a year, but just don’t have any savings yet, you’ll be able to afford the loan payment and build equity quickly.
If you’re getting a no down payment mortgage because you struggle to save money in the first place, that’s when you’re putting yourself at risk.
Owning a home can be expensive. You need to consider the cost of things like utilities, which can often be higher than what you pay in a small apartment. You may also have to deal with unexpected repairs, such as a damaged roof or broken water heater.
If you’re struggling to save without owning a home, a large home-related expense could drive you into expensive credit card debt.
In the worst-case scenario, if home values drop, you might wind up underwater on your loan. If you end up having to sell your home, you might not be able to sell it for enough to repay your mortgage, leaving you to make up the difference.
Getting a loan with a down payment means you’ll have some equity right away. Even if home values drop slightly, there’s a better chance you won’t go underwater on the loan.
Pros and Cons of No-Down-Payment Home Loans:
No Down Payment Necessary
The obvious benefit of a no down payment loan is that you can buy a home without needing to make a down payment. That means you don’t need to spend time saving money down before buying a home or spending any of the money you’ve saved or invested.
Higher Interest Rates
When you buy a home without putting any money down, the lender is assuming more risk by making the loan. Your mortgage lender will try to compensate for this risk by increasing the interest rate it charges on the loan.
Higher interest rates mean a more costly loan overall.
Higher Monthly Payments
The larger your down payment, the less money you have to borrow to buy a home. That means that bigger down payments make for lower monthly payments. In turn, making no down payment means a higher monthly payment.
If your budget is tight, a no-down-payment loan might be hard to afford on a month-to-month basis.
Could Go Underwater on Your Loan
If you don’t have a down payment, you don’t have any equity in your home until you start making payments. Even then, you’ll build equity slowly as your initial payments will largely cover interest rather than go toward the principal.
This means that even a slight drop in property values could leave you underwater on your loan.
How does bad credit affect a home loan application?
If your credit report shows that you have bad credit, it can affect home loan applications in a few ways.
One is that it can make it harder to qualify for a conventional loan. Some lenders will refuse to give you a loan based on your recent credit history or if you fail to meet a minimum credit score requirement.
If you do qualify for a mortgage loan, whether a conventional loan or one through a special loan program, your lender will probably make you pay a higher interest rate for the loan. The higher the interest rate, the higher your monthly payment and the more the loan will cost overall.
In dire circumstances, you won’t be able to find any traditional lender who will give you a home loan.
When are credit scores too low to qualify for a mortgage?
To qualify for a conventional mortgage, you typically need to have a credit score of 620 or better. The higher your credit score, the lower the interest rate you’ll receive and the smaller the required down payment.
Even if your score is below 620, there may be some options available. You might be able to qualify through a special program, such as getting a VA loan, though many lenders will still want you to have a minimum credit score.
There isn’t a set credit score at which every lender will deny your application, but the lower your score gets and the more negative information there is in your recent credit history, the harder it will be for you to get a loan.
If you’re trying to learn how to raise your credit score 200 points to help you get a cheaper mortgage, there isn’t an easy way. It takes time and a solid payment history. The good news is that rebuilding your credit gives you time to build your savings to make a down payment.
How much extra will a low credit score cost you?
A low credit score can make a huge difference in how much your mortgage costs, both on a monthly basis and overall.
If you borrow $250,000 to buy a home and have great credit, you might be able to secure an interest rate of 3%. If you do, you’ll pay $1,054 per month and $379,444 overall.
If you have good, but not excellent credit, you might get charged 4% interest. Just a 1% increase in the loan’s interest rate will boost your monthly payment to $1,194. The overall cost of the loan will be $50,230 higher at $429,674.
If you have bad credit, you might wind up paying as much as 7% interest. Over a thirty-year mortgage, you’ll pay $1,663 per month or $598,772 overall, an increase of almost 58% over the cost of a mortgage at 3% interest.
Are zero-down mortgages a good idea?
The unfortunate truth is that zero-down mortgages are generally a bad idea. If you don’t have the money to afford a down payment, you’ll likely struggle to afford closing costs, home maintenance, or the unexpected expenses associated with owning a home.
Not having a down payment also drives up your mortgage’s cost by increasing the amount you need to borrow and subjecting you to mortgage insurance, which further boosts your monthly costs.
There’s also the danger of going underwater on your loan. If that happens and you have to sell, you’ll need to make up the difference between your home’s value and the mortgage, which is a bad situation to be in.
The best thing to do is to take the time to save money to make a down payment, even if it’s a small one. It will show lenders that you’re serious about buying a home and give you a better chance of getting a mortgage with good terms.
While it’s hard to buy a home with no money down and bad credit, you shouldn’t lose hope. With a bit of time and effort you can improve your credit and save up some money, making it much easier to qualify for a loan.
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