Bad Credit Series: Home Loans with Zero Down for Bad Credit
Owning your own home is a very common dream. Unfortunately, home ownership is sometimes out of reach due to not being able to afford a large down payment and other common loan costs. This is compounded if you have less-than-perfect credit since many lenders who cater to those with bad credit require a larger down payment on top of higher interest rates. Is there no way to get around having to come up with such a large down payment?
If you know where to look, you can likely find a home loan with a much smaller down payment. In some cases, you may even be able to find loans with no down payment at all. Just keep in mind that if you’re shopping for home loans for bad credit, no money down loans aren’t going to be cost-free. You’ll see why in a minute.
About Down Payments
Down payments can become a big problem for people with credit problems hoping to buy a home. Depending on your lender and your credit score, you may be required to put down 20% or more of the home’s total value as a down payment. This is in addition to insurance, closing costs, and other requirements that you typically have to pay for out of pocket.
The reason that the down payments are so high is to reduce potential losses for the lender. If you have a low credit score, you’ve obviously had financial problems in the past. While there may have been extenuating circumstances that caused the drop in your credit score, the lender has no way of knowing that.
Because the assumption is that low credit scores are caused by defaults and a poor payment history, the lender tries to reduce the amount you borrow in comparison to the value of the house you buy. If you end up defaulting on the loan, the value of the home should be greater than the amount you borrow even if the lender has to sell the home at lower than market rate.
This is all fine for the lender, but it obviously doesn’t do much to make your home loan more affordable. Fortunately, there are ways you can bring that down payment amount down significantly.
Reducing Your Down Payment
If you want to reduce the amount that you pay up front, you have a few options. One of the best ways to do this is to look for a loan that is backed by the Federal Housing Administration (FHA). These loans are designed to make home ownership more accessible to people with a wide range of backgrounds and income levels. Not all lenders offer FHA loans, but the FHA website has a tool to help you find lending partners in your area.
There are two major advantages to seeking out an FHA loan instead of going for a conventional loan if you have less-than-perfect credit. FHA loans allow lenders to accept a wider range of credit scores for mortgages, so you can qualify for a loan more easily than you would without this FHA backing.
Loans backed by the FHA also have significantly lower down payments—instead of the 20% or more that you would see on conventional or subprime loans with bad credit, an FHA-backed loan requires only 3.5% of the home’s value as a down payment. Additional limits on closing costs and other out-of-pocket expenses are also included, and some expenses such as mandatory mortgage insurance can even be bundled into your loan amount.
Of course, a 3.5% down payment is still more than some people can afford. Getting rid of the down payment completely would be ideal, but you’ll be hard-pressed to find a loan with no down payment by default when you have bad credit. Don’t give up, though … there are still a few options available to drop your down payment even further, but some of them might shift the cost elsewhere.
There are many situations where family or friends who are like family can provide you with funds known as “gift money” to help you get into a home without laying out your own money. Although this isn’t technically a zero-down loan, it is a way to reduce your out-of-pocket costs significantly. Your gift funds must be gifts and must not have any sort of repayment agreement attached. They also need to be in an account that underwriters can verify and create a paper trail for in order to remain compliant with various laws that cover large fund transfers.
Finding Zero-Down Loans
Provided you qualify, there are a few other programs available that can provide you with no-down payment home loans. The U.S. Department of Agriculture (USDA) offers a zero-down home loan program for low- to moderate-income families living in rural areas, and the Veteran’s Administration (VA) has special loan programs for veterans that require no down payment and even eliminate the need for mortgage insurance. There are special qualifications for these USDA loans and VA loans, so not everyone will qualify. But if you are a veteran or live in a qualifying rural area, then they’re definitely worth looking into.
Finding the Best Loan for Your Needs
Take the time to visit different lenders and find out what loan products they offer, especially if you have lenders in your area that can process FHA loans or other government-backed loan products. A home is a major purchase, so you need to shop around for your loan to try and find the best terms possible given your credit situation. Discuss your options and try to find a solution that reduces or eliminates the down payment, but don’t focus so much on dropping the down payment that you shoot yourself in the foot with private insurance premiums.
A zero-down loan is a great way to get started with home ownership, but it’s important to make sure that you can also afford to keep paying on your loan from month to month. There are cases where a low down payment provided by an FHA loan may actually be better in the long run than a loan with no down payment at all, so be sure to keep your options open until you find the loan that’s best for you.