*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
Many potential home buyers wonder how much they’ll need to save in order to get a mortgage. But did you know it’s possible to buy a home without a down payment?
We’ll take a look at some options you have when you want to buy a home without a down payment. We’ll also show you a few alternatives for low down payment loans as well as what you can do if you have a low credit score.
Overview: The Zero-Down Mortgage
As the name suggests, a zero-down mortgage is a home loan you can get without a down payment. A down payment is the first payment you make toward the home and it’s due when you close on your home loan. Lenders usually calculate your down payment as a percentage of the total amount you borrow.
For example, if you buy a home for $200,000 and you have a 20% down payment, you’ll bring $40,000 to the table at closing. Lenders require a down payment because it lowers the risk for them that you won’t pay your bills. Down payments are a major hurdle for many home buyers, as it can take years to save up for a lump sum of cash.
You can only get a mortgage with no down payment if you take out a government-backed loan. Government-backed loans are insured by the federal government. In other words, the government (not your lender) foots the bill if you stop paying back your mortgage.
The government offers insured loans to people who need financial assistance to buy a home. This means that government-backed loans are less risky for the lender and they can expand their usual loan criteria to people with riskier financial profiles, such as borrowers with no down payment.
There are currently two types of government-sponsored loans that allow you to buy a home without a down payment: USDA loans and VA loans. Each loan has a very specific set of criteria you need to meet in order to qualify for a zero-down mortgage.
You may want to get a government-backed FHA loan or a conventional mortgage if you find out you don’t meet the qualifications for a USDA loan or a VA loan. Both of these options will allow you to make a low down payment.
Options For A Zero-Down Mortgage
Let’s take a look at how you can get a USDA loan or a VA loan, the two loans that allow you to buy a home without a down payment.
A USDA loan is a loan backed by the United States Department of Agriculture. The government offers USDA loans to encourage development in rural and suburban areas. In order to encourage people to move into more rural areas, you can get a USDA loan with $0 down. USDA loans also have lower fees than other types of loans.
Both you and your home must meet a few criteria to qualify for a USDA loan. First, your home must be in a rural or suburban area. Check out the USDA’s map of eligible areas to find out if your home qualifies. On this map, anywhere outside of an orange zone qualifies as a rural area. In addition, 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 also need to meet a few financial requirements to qualify. The combined gross income in your household cannot be more than 115% of the median income of the county your home is in. Your debt-to-income ratio shouldn’t be higher than 45% and you must have a FICO® Score of at least 640.
You may qualify for a VA loan if you’re an active-duty service member, member of the National Guard, 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 funding fee that’s 2.15% of your loan value in lieu of mortgage insurance.
In order to qualify for a VA loan, you must meet any one of the following service requirements:
- Served 90 consecutive days of active service during wartime
- Served 181 consecutive days of active service during peacetime
- Served for more than 6 years in the National Guard or Reserves
- Be the spouse of a service member who died in the line of duty or from a service-related disability
In addition to service requirements, you should have a credit score of at least 640 to get a VA loan.
Options For A Low Money Down Mortgage
Don’t qualify for a USDA or a VA loan? There are still a few ways that you can buy a home without spending years saving for a down payment. Let’s learn more about low down payment loan options.
Many people believe that if they want to get a conventional loan, they need a 20% down payment. This isn’t actually true. Depending on your lender, you can get a loan with as little as 3% down. The confusion comes from the private mortgage insurance (PMI) requirement.
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 payments on your loan. Regardless of the fact that you’re the one paying for it, PMI offers no benefits. As a result, most people want to cancel 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 want to consider a Home Possible®loan from Freddie Mac if you have low to 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. You can’t earn more than 100% of the median income in your area to qualify. Unlike USDA loans, this stipulation only applies to the parties on the loan, not your entire household.
FHA loans, which you can get with as little as 3.5% down, are backed by the Federal Housing Administration and are loans for people who have low to moderate income. FHA loans have fewer requirements than USDA and VA loans. For these loans, you must plan to live in the property you’re buying as your primary residence, buy a home that meets livability standards and move in within 60 days of closing.
It’s important to keep in mind that you’ll need to pay for mortgage insurance throughout the life of the loan if you have a down payment of less than 10%. Some people get an FHA loan, wait until they build 20% equity in their property and then refinance to a conventional loan as a workaround. This eliminates the lifetime mortgage insurance requirement.
Mortgage Options For Bad Credit
Is bad credit stopping you from getting a mortgage? Credit plays a very important role in your ability to get a mortgage. Here are two solutions if you’re more concerned about your credit score than your down payment:
FHA loans aren’t just great for people with a low down payment. They’re also a viable option if you have a low credit score. All you need is a credit score of 580 to get an FHA loan combined with a lower down payment. However, you’ll have to make up for it with a larger down payment if your credit score is lower 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 to closing. The minimum credit score with Rocket Mortgage® is 580.
Raise Your Credit Score
You’ll need to raise your credit score if your score is below 500 or you don’t qualify for an FHA loan. Even if you can get a loan right now, there are plenty of benefits to applying for a loan with a higher score. A higher credit score gives you more lender choices and access to lower interest rates. An interest rate that’s just a fraction of a percentage point lower can save you thousands of dollars over the course of your loan, so investing in your score is worth the effort.
Here are a few tips to help raise your credit score:
- Pay down 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 schedule.
- 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 you’ll need to pay back in full.
- Remove any errors on your credit report.
- Wait patiently while your accounts become older and more appealing to lenders.
Government-backed USDA and VA loans can allow you to buy a home with $0 down. The fact that these loans are backed by the federal government allows lenders to be more lenient with down payment requirements. Both you and your home must meet USDA loan standards to qualify for a mortgage, and you must meet service requirements with a VA loan.
You may also be able to get a conventional loan with a low down payment. Freddie Mac’s Home Possible® program offers lower monthly mortgage insurance payments and loans with 3% down. You can also get a government-backed FHA loan with 3.5% down which is a great option if you have bad credit. Depending on your down payment amount, it’s possible to get an FHA loan with a score as low as 500 points. You’ll need to increase your score before you apply for a loan if your score is lower than 500.
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