To get approval for a no money down mortgage, you should aim to have a score of 640 or better. While there are options for those with lower credit scores, the higher your score, the better the interest rate.
And if you don’t meet the qualifications for a no money down mortgage, there are some alternative low-money down loan options available as well.
The No Money Down Mortgage
A no money down mortgage is exactly that, a loan on a house that doesn’t require you to put up any cash against the purchase price.
These mortgage loans usually come loaded with lots of other benefits which include no need for private mortgage insurance (PMI).
On conventional loans, if the buyer is putting up less than 20% of the purchase price as a down payment, the bank requires PMI. PMI protects the bank in case you foreclose on the home before you reach 20% equity.
A no money down mortgage with no PMI can save you a lot of money. And these loans usually come with lower interest rates, even if your credit is not excellent. They can also come with other benefits, incentives, waivers, and more.
The downside is that the availability of a zero-down mortgage is very limited. And even if you do meet all of the qualifications, be prepared to do extra paperwork and wait around for appraisals and inspections.
Options for a No Money Down Loan
The options for a zero money down loan are very limited. Currently, there are only three types of these loans: USDA loans, VA loans, and Physician loans. You might have to meet some strict qualifications for these loans, but they usually come loaded with many money-saving benefits.
USDA Loans
A USDA loan is designed for those with low to moderate income who wish to purchase a home in a rural area.
These loans can be obtained through any United States Department of Agriculture (USDA) approved lender. There are also certain circumstances where the USDA can directly issue the home loan.
To get a USDA loan, there are a few requirements for both you and the house.
Homebuyer Requirements
- Your base income must not exceed $91,900 for a 1-4 person family or $121,300 for a 5-8 person family.
- You have to be a US citizen or permanent resident.
- Proof of dependable income.
- A credit report and score that meets the lender’s requirements.
Home Requirements
- The home must be located in a rural area (maximum population 35,000).
- The residence has to be a primary single-family home (no farms or investment properties).
VA Loans
This type of zero money down loan is made through a credit union or bank and backed by the US Department of Veterans Affairs (VA).
In order to qualify for this type of loan, borrowers need to be a veteran, service member, or the spouse of a veteran or service member who lost their life in the line of duty.
Furthermore, service members must have been active for at least 181 days or had 6 years of service in the national guard/reserves.
Since VA loans are issued by traditional lenders, you will also need to meet the lender’s credit requirements.
One benefit of a VA loan is that there is no cap. So long as your income meets the VA’s residual income requirements, there is no limit on how much you can borrow, you can even do a jumbo loan.
An exemption to this is if you already have a VA loan on another property which diminishes your entitlement.
One downside to the VA loan is the funding fee. This is the fee the VA charges to keep providing its services to all veterans. The fee is around 2.3% of the purchase price of your home and can be added to the loan value. If you are a disabled veteran, this fee can be waived.
Physician Loans
This type of loan is designed for doctors that are just starting in their career. Thanks to their high student loan debt and short work history (i.e. just graduated from medical school), a young doctor’s credit report and score makes them a poor candidate for a traditional loan.
To qualify for the loan, you must have your MD or DO. Although, some mortgage lenders also offer this type of loan to dentists, veterinarians, and other types of medical professionals. Also, the property you are looking to buy has to be your primary residence.
While these loans let you put as little as no money down without incurring a PMI, there are some drawbacks.
Unlike VA loans or USDA loans, your interest rates are usually higher than a traditional loan. Additionally, these interest rates are variable, meaning they start low and increase over time.
This type of variable interest rate was partly behind the 2008 housing market crash.
What Kind of Credit Score do you Need to Buy a House with No Down Payment?
This can depend on the type of loan you are getting and which lender you are getting it through.
Since USDA and VA loans are guaranteed by a government agency, this incentivizes lenders to issue this type of loan.
This could mean that not only are they likely to offer you lower interest rates, but they may also be willing to accept a below average credit score.
As a base rule, lenders are usually looking for a minimum credit score that is 640 or above.
If you have a score that is lower than that, you may still be able to get a no money down mortgage, but your application will have to go to manual underwriting, which will likely slow down the home buying process.
It isn’t just the credit score the banks are looking at when evaluating your mortgage application, they also look at your overall credit report.
This is especially true for Physician loans where the typical applicant has a high amount of debt and might lack proof of dependable income. For this loan, the focus is less on your credit score and more on your responsibility with debt and if you have a guarantee of a future job.
If you do find yourself in a place where the bank or VA is encouraging you to boost your score before taking out a mortgage, you can look at Credit Strong’s credit builder loan. This personal loan can help you establish a good payment history to boost your score quickly.
Should You Choose a No Money Down Mortgage?
If you can qualify for a no money down mortgage, getting one can save you money. But, depending on your unique situation, it may not be the best choice. A mortgage is a long term investment and you need to weigh all the pros and cons before signing on the dotted line.
Pro 1- No Money Down & No Mortgage Insurance
No money down means you can get into a house sooner rather than spending years saving up enough for a down payment. If you live in a rapidly developing area, buying now could save you from significant price increases caused by a hot housing market.
A no money down mortgage can also help you escape the dreaded PMI charges.
For a traditional home loan, a PMI charge is added to your monthly payment until you hit 20% equity in your home. For a $300,000 home on a 30-year mortgage, these charges could add up to $10,000 or more.
Beware though, VA loans do charge a funding fee and USDA loans charge a guarantee fee, both similar, but usually lower in cost than a PMI.
Pro 2- Low Interest Rates and Other Savings
Both VA and USDA loans are backed by the government, this means that the bank or lender is taking on much less risk. Because of this, they are usually willing to offer you better interest rates.
Your credit score has the biggest factor in the interest rate you receive on a mortgage. But the government guarantee could qualify you for a lower interest rate.
Curious about what rate you qualify for? Check out our mortgage rates by credit score breakdown.
A lower interest rate will save you money over the life of the loan, but this is not the only savings you will see. VA loans in particular come with a whole host of other money saving benefits like capping closing costs, no prepayment penalties, waiving funding fees, and more.
Pro 3- High Approval Rates & Low Credit Score Requirements
All three of these mortgage types can give people who might otherwise struggle to get approved for a traditional mortgage a good chance of closing on the house of their dreams.
In the case of the VA and USDA loans, the backing of the government encourages the lender to execute the mortgage. And in the case of the Physician loan, the high-income potential of the buyer sweetens the deal for the bank. This leads to high approval rates.
And where there are high approval rates, there are less stringent credit requirements.
What is a good credit score to buy a house? Usually, 760 is the number you want to shoot for to get the best rates. But with a no money down mortgage, you can usually get approved for the loan with a reasonable interest rate with a credit score as low as 640.
Con 1- Could Leave You Underwater on Your Home Loan
The biggest potential disadvantage to any zero money down mortgage is that you may end up underwater on the loan.
In a booming market, property values go up and you quickly build equity in your home. The opposite happens in a down market.
Let’s say you purchase a house for $300,000 on a zero down mortgage loan. Since your initial payments are heavy on interest, after two years you might end up with only $10,000 in equity. Then the housing market dips, and your home is now only worth $250,000.
This leaves you with -$40,000 in equity. If you plan on staying in the home long-term, a temporary down-turn won’t hurt you too much, but if you had planned on selling, refinancing, or making major renovations, this negative equity will hurt you.
If you had put 20% down on the house ($60,000 in this case) instead of doing a no money down mortgage, you’d have positive equity.
Con 2- Slow Processing
No money down mortgage loans come with some pretty strict guidelines. To ensure that you and your house meet these guidelines, some extra paperwork is involved.
For a USDA loan, you need to provide W2s to ensure your income is below the limits and you need to verify that your home is in a rural area.
For VA loans, you need to provide proof of military service. And for Physician loans, you’ll need to provide a letter from your employer showing that your job is long-term and sufficient pay.
This paperwork takes time.
So do the very specific inspections that the VA and USDA require before closing on the mortgage.
This extra time is not only inconvenient, it could cost you the house if there are other parties interested who have quicker financing.
Con 3- Limited Housing Selection
Zero down mortgages can also limit your housing selection.
Both the USDA and Physician loan require the property to be a single-family dwelling that is intended to be your primary residence. No investment properties, no farms, and the Physician loan also eliminates condos.
The nature of the USDA loan requires that the property be rural, and they have very specific definitions of what rural is. The town or the property may not qualify even if you view the area as rural.
While the VA loan is open for use on investment properties, or as a jumbo loan (high-value properties), there are some limitations. You can’t take out an unlimited number of mortgages. And if you previously foreclosed on a VA loan, your entitlement will be diminished.
Fixer-uppers or houses needing immediate renovations will likely be out as well since you usually need equity in your home before you take out a home remodeling loan.
Options for a Low Money Down Loan
If you don’t qualify for a zero money down loan, or you want more freedom in choosing your home’s location, several alternatives only require 3-5% in a down payment.
Fannie Mae HomeReady Loans
This mortgage type was designed with low-income families in mind. You can only apply for the loan if you make less than the median income for that area. Though, this limitation can be waived for properties in designated low-income areas.
The down payment requirement starts as low as 3%. So the down payment amount on a $300,000 home would only be $9,000. And you can use gift funds or down payment assistance money towards the purchase price.
Since the down payment requirement is low, you will need mortgage insurance. Even so, the option Fannie Mae offers is affordable and cancelable.
And you can get approved for this loan with a score as low as 620. However, they promise better rates if your score is above 680.
This type of mortgage does require you to complete a homeownership education course if you are a first-time homebuyer.
Conventional Loans With PMI
A conventional loan with PMI is the most common type of mortgage issued in the US.
This type of mortgage is not backed by any government agency or special program. The lender is taking on full responsibility for this loan. Because of this, the loan requires 5% down (so $15,000 for a $300,000 home).
A minimum credit score of 620 will be needed, but with a higher credit score, the interest rate will be better.
Since more money is put down, this could also decrease the interest rate as well as the PMI. And you can cancel the mortgage insurance once you’ve paid enough of the loan.
One note on a conventional mortgage down payment is a limitation on where the funds can come from. The majority of the down payment has to come from your bank account. This puts a limit on the gift or grants that you can use towards the down payment.
FHA Loans
An FHA loan is the most common low down payment mortgage option. The required downpayment starts as low as 3.5%, which would be $10,500 for a $300,000 home.
Once again, the low down payment requirement means you will need mortgage insurance, and you could end up paying this insurance premium for the duration of the loan.
The key advantage to an FHA home loan is their flexibility in minimum credit score requirements. At a 3.5% percent down payment, you can qualify for the FHA mortgage with a score as low as 580. But you’ll likely pay for it with a higher interest rate.
And if you are willing to put down 10% ($30,000 for our $300,000 home example), then you can get approval from an FHA lender with a bad credit score as low as 500.
A special note on the FHA guidelines is that you do not have to be a first-time homebuyer to qualify for this type of mortgage.
Freddie Mac Home Possible Loans
The Home Possible loan is similar to the HomeReady loan.
The minimum downpayment is 3%, so $9,000 on a $300,000 home, and you can use whatever funds you have to meet that amount (i.e. down payment assistance funds). But mortgage insurance is required up until you reach that 20% mark, at which point you can cancel it.
The minimum credit score required for this type of loan is a bit higher at 660. And the property must be your primary residence.
Additionally, there is an income threshold, your household cannot exceed 80% of your area’s median income to qualify for this loan program.
And, like the Fannie Mae loan, if you are a first-time homebuyer, you will need to go through a homeownership course and counseling.
Getting Your Credit Ready
If a home loan is in your near future, then it is important that you get your credit ready now. While there is a focus on your credit score, lenders will be evaluating all aspects of your credit report. What is your debt to income ratio? What does your length of credit history look like? Etc.
If your credit is less than stellar, or you are hoping to get a low interest rate, take steps now to build your credit. Pull your credit report, pay down debt, and dispute errors immediately. You can even take out a credit builder loan to boost your payment history with all 3 credit bureaus.
And, if you otherwise qualify for a mortgage loan, but are struggling to find the money for a downpayment, you can always ask your lender about any down payment assistance programs they support.