How Do I Buy a House With No Down Payment and Bad Credit?
Homeownership is still possible with poor credit.
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Don't rule out homeownership because you don't have a down payment and are dealing with bad credit. Programs exist for buyers who are working toward rebuilding their credit and buying a new home. The terms might not be ideal, though, and you may pay higher interest rates and premium mortgage insurance as a result.
Factors Affecting Loan Underwriting
Lenders look at debt, income, creditworthiness and home value when deciding whether to give you a loan. Even when your credit is bad, you can demonstrate that your financial situation is improving.
Pull your credit report from a credit reporting agency and review it for errors. Successfully disputing errors improves your score. Additionally, look for credit debt you can eliminate such as newer credit cards. Pay them off and cancel them, reducing the overall credit accessibility. Older credit cards hold more weight in your credit score, so don't get rid of everything. Speak to a lender or credit counselor and develop a plan if you aren't sure where to start.
You may also consider a co-signer to guarantee the loan. A co-signer should have strong credit with enough income or assets to cover the debt if you default.
Veterans Affairs Loans
VA loans are federally insured loans available to existing servicemembers, veterans and surviving spouses. These loans cover up to 100 percent of the home purchase price. VA loans don't have specific credit score limits, but they require a debt-to-income (DTI) ratio of 41 percent or better. This means your debt with the loan can not exceed 41 percent of your monthly income. Credit scores are lender-determined to establish rates. Loans may have limits based on entitlement, which is determined by years of service.
U.S. Department of Agriculture Loans
The USDA has a program for homes in rural agriculture zones that qualify for zero down payment financing. For these loans, buyers must intend to live in the home. There are income guidelines for eligibility: Your income must be less than 115 percent of the region's median income ranges. The DTI ratio on USDA loans is 29 percent front-end, meaning before the mortgage is added in and 41 percent back-end, after the mortgage is included.
Federal Housing Administration Loans
An FHA loan is typically thought of as a minimum down payment loan, asking as little as 3.5 percent down. For some, even this is more than they can afford. If you don't have the downpayment but feel you meet all other standards, talk to your realtor about structuring the home purchase with the sellers giving you credit for the down payment. This means you need no money down, and the seller may move a property that was sitting idle on the market. Sellers' credits are capped at 6 percent, so you might have to make some concessions in other areas. Discuss it all with your realtor.
Look for a Grant
Look and you might find a grant to assist with the down payment. Lenders accept gifts for down payments as well, but this might not be an option. Some organizations offer grants to assist with buying a home.
The National Homebuyers Fund Inc. offers up to a five percent closing cost grant for FHA, VA, USDA and conventional loan programs. Eligible participants can use the grant for down payments or closing costs.
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About the Author
With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.
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