People who just entered the housing market looking for their first home often feel like they haven’t got enough money for a down payment, but this doesn’t always have to be the case.
In fact, you can actually buy some homes without ever needing to make a down payment, to begin with, all with the help of zero-down payment mortgages.
By taking out this type of home loan, you won’t have to make that first payment towards the home’s selling price, whereas you’d normally be looking at a figure equal to a certain percentage of the amount you’ve borrowed.
Buying a home for $200k with a 20% down payment means you’ll have to come up with $40k to bring to the table when closing the contract, with the reasoning being that you’ll be much more hesitant to default on the loan if you’ve already made an investment.
How does it work
Currently, the only way to take out a mortgage without being forced to make a down payment is through government-backed loans, those being loans that are insured by the federal government.
With these types of loans, in the case of you defaulting, the government will help cover the bill along with your lender.
Government-backed loans are usually offered to individuals and families in need of some financial assistance when they’re buying a home, which allows the lender to expand their usual criteria without actually exposing themselves to the risk that a borrower like that poses.
At the time, you’re only able to take out a loan of this type through VA loans and USDA loans, each coming with its own set of eligibility criteria you’ll have to meet if you’re looking to completely avoid making a down payment on the mortgage.
In order to qualify for a loan of this type, you must be a currently-active servicemember, a member of the National Guard, or a reserve veteran/reserve veteran’s spouse.
These loans, backed by the Department of Veterans Affairs, allow you to pay a one-time funding fee that amounts to 2.3% of your loan, with this fee being a replacement for mortgage insurance that you’d normally be paying with a conventional loan.
However, each following loan you take out will have a higher funding fee, so long as you’re looking to make no down payment, and you’ll instead have to pay 3.6% of the loan’s value every time.
Apart from requirements tied to the time you’ve spent in service, VA loans also require you to have a credit score above 580, although some lenders may offer more favorable conditions, so make sure to shop around.
Unlike the VA loan, this loan is backed by the US Department of Agriculture, which aims to encourage construction and development in rural areas of the country as well as some suburban areas near larger cities.
Compared to conventional loans, you may notice that the USDA loan comes with significantly lower fees, making it a desirable option for low-income Americans looking to make improvements to their current residence.
However, not every home can qualify for a USDA loan, and you’ll want to carefully examine a map of the eligible areas on the USDA’s official website, where you’ll also find some additional info on how USDA loans work.
On top of the location requirements, USDA loans are also only available to households with a total income below 115% of the median income in the county.
Is bad credit a recipe for disaster?
If your bad credit score is getting in the way of you getting a mortgage, there’s still hope, because a lot can be done to actually improve your score, and sometimes you can work your way around it with some clever tricks.
A good example is a credit score of 500, which is usually not enough to get an FHA loan, and most lenders will require a credit score of at least 580 to approve a mortgage.
However, you can offset this by making a slightly larger down payment, and with some lenders, if you’re able to bring a 10% down payment to closing, you may even be able to get away with a credit score of just 500.
On the other hand, if your credit score is below that, you’re in a world of trouble, and you’ll want to start working on improving it right away.
One way to go about it is by paying down your outstanding debt and making sure all your credit card payments are on time.
Another low-risk option to consider would be taking out a personal loan and then slowly paying it back in regular installments, which is practically free credit.
There are dozens of other options for you to try at this point, but if none of it seems plausible at the time, you may just want to give it some time and wait for your accounts to become more appealing to your lenders.