Home Loans with Bad Credit and No Down Payment

Can I get a Home Loan with Bad Credit and No Down Payment?

young white woman looking through documents with calculator in her kitchen

When you were in school, it was horrifying to hear that something would be put on your “permanent record.” But, as it turned out, that wasn’t such a big deal. The only permanent record you have to fear as an adult is your credit file. A rocky start or even a prolonged hard spot can make it very difficult to buy a home of your own. When you couple that problem with having a small or nonexistent downpayment, there aren’t a lot of options for purchase.

On the other hand, you may be among the lucky few who can still get into a program with no money and troubled credit. So many zero down programs have ended due to the real estate market collapse of 2007, but a few helpful ones are still out there.

Bad Credit? You Have A Few Options for Buying a Home

There’s no use in hyping you up just to get your hopes dashed down the line. There aren’t a lot of programs that will accept a poor credit score when it’s coupled with no downpayment. The risk that banks were exposed to during the recession has made them more conservative in terms of the types of buyers they’re willing to take on. It’s nothing against you personally, it’s just that some actuary somewhere said you had a certain percent chance of default. As it turns out, that percentage is too much for many banks, closing a lot of doors.

There are, however, a couple of programs that may still accept you with a low credit score. Let’s see if any of them would be a suitable match.

United States Department of Agriculture Single Family Housing Guaranteed Loan Program

This program is open to anyone who can meet the income requirements and plans to live in an area considered “rural.” This generally means a place with under 35,000 residents. With this program, you can also get assistance with closing costs. USDA will check your credit, but they are much more forgiving of past credit disasters than other entities.

USDA Single Family Housing Direct Home Loan

If your earnings place you into the low- or very low-income brackets as determined by the USDA, you may be eligible for the Single Family Housing Direct Loan. There are plenty of rules about the kind of house that you can buy with this loan. The highlights include:

  • It must be under 2,000 square feet.

  • No in-ground swimming pools.

  • Not equipped to be used for income-producing activities.

It seems like a lot of nitpicking, but when you get your downpayment and closing costs covered and pay an interest rate as low as one percent, it’s worth it. Jump through the hoops; you’ll not regret it.

VA Home Loans

Active and retired members of the military may qualify for a VA loan, saving the effort involved with a conventional mortgage. VA loans typically require no downpayment and are very flexible when it comes to credit scores. This is because the VA guarantees your loan to the bank that’s writing it, shifting some of the responsibility to that entity. It’s not the same as a co-signer, but when it comes to the bank lending the money, it’ll do. Don’t believe that the VA won’t evict you if you stop making your payments, though. It does and it will continue to do so. The loan limits vary from year to year, but the VA is kind enough to publish those changes here.

Non-Qualified Mortgage Loans

These loans are often referred to as “B/C Paper,” “Non-Conforming Conventional Loans,” or even just “Bad Paper Loans” by mortgage professionals. It doesn’t take a huge mental leap to figure out why. You may be able to get a mortgage using one of these lenders, even with nothing down and bad credit, but you may also regret it very quickly.

B/C loans are made assuming the very worst about your risk profile and with the highest interest rates possible. They tend to use lots of non-standard tools to make a payment fit well within your income. A lender may offer you an “interest-only” loan or a “pay option ARM,” both products you’d be best to avoid.

If you do decide to use a B/C lender, check their online reputation thoroughly, read every document from top to bottom before signing and, above all else, make sure you really understand what you’re getting. Adjustable rate mortgages that adjust very quickly and often can be a recipe for default; those interest-only loans and pay option ARMs have a proven track record for creating negative equity. The last thing you want is to buy the house of your dreams and lose it to the bank.

The Best Action May Be Credit Repair

If you’ve got bad credit and no downpayment, it might be better for you to work on fixing your financial problems first. After all, for most people, there’s not a house-buying emergency on the horizon. You can take your time and put your energy into a direction that will improve other aspects of your life, too! Remember, you can get a free credit report from each of the reporting agencies at annualcreditreport.com yearly. It’s a great place to start rebuilding your credit.

If you'd like to explore more mortgage options, fill out the form below and a home loan specialist will reach out to you.