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Homeownership is a necessity for stability, independence, and generational wealth. The problem? Not everyone may have all the recommended items in place to make homeownership a reality.
In order to buy a home, you have to have income, good credit, and a down payment. You can buy a house with any two of these, but not with only one.
If you’re interested in learning how to buy a house with no money down and bad credit, let’s take a closer look at what your options are and why you might consider taking more time before attempting to secure a house of your own.
What Is a Bad Credit Score According to Lenders?
Your credit is arguably one of the most valuable tools in your arsenal when you plan on buying a house.
Unless you have enough cash to purchase a home outright, you’re going to need to secure a mortgage to afford your new property. Of course, this begs the question, just how bad does credit have to be to bar you from homeownership?
Generally, any credit score that falls under 620 is going to get your application turned away by mortgage lenders. Even though you could possibly get unconventional loans at 580, the likelihood of finding a lender that will accept that is relatively limited.
The higher your credit score is, the easier it will be to secure lending. More importantly, it will be much easier to find terms that are amenable to you and will support you as a homeowner while you work towards paying off your mortgage.
What Credit Score Is Needed to Buy a House with No Money Down?
So, what’s the credit score needed to buy a home?
Continuing with the above, you’re going to need a credit score of at least 620 if you want to purchase a house while paying no money down in the process. Still, this is a nuanced conversation that isn’t as straightforward as hitting that credit score goal.
You need to take into consideration what type of no-money-down program you’re looking to take advantage of as well as what your income looks like.
If you don’t have enough money for a down payment, you’re looking at much higher interest rates on your loan alongside additional house-buying costs like mortgage insurance.
This goes back to our initial statement. You need two of three things to purchase a home: solid income, good credit, or a down payment.
If you have the credit score but you don’t have the income to be able to afford your mortgage terms, you can end up having your house foreclosed on rather quickly. Getting all of your ducks in a row and planning ahead makes all the difference when buying a home.
Is It Possible To Buy A House With Bad Credit?
Is it possible to buy a house with bad credit? Certainly. People have done it before. But the most important question to ask yourself now is, should I be buying a house with bad credit or should I wait and see what I’m able to do in the future with better credit?
Buying a home is a serious investment, and there are several considerations you should consider when bad credit defines the buying experience. These include:
- Loan Terms: Purchasing a house with poor credit means dealing with higher interest rates. This is naturally going to impact your personal finances and make it difficult to afford your home, especially without a down payment to chip away at initial costs. Are you willing to accept such loan terms at this point in time?
- Financial Burdens: Bad credit might be indicative of existing debt or lack of income to cover the said debt. What financial burdens are currently impacting your credit? Can you afford to add an investment like a house to your current financial stressors? How much credit history is needed to buy a home, and what does yours reveal?
- Buying Power: Just because you can buy a home with bad credit doesn’t always mean you should. How much home can you afford at this point in time? What is the quality of homes that you have access to? Is this the type of home you really want to buy? Is it going to cost you more over the long term because it’s a fixer-upper?
- Life Circumstances: Perhaps right now is not the right time to purchase a home. Maybe there are other goals you have yet to reach or certain life developments that you need to work through before you’re comfortable buying a home. Consider where you’re at in life and whether or not homeownership really makes sense for you right now.
If you can hold off and wait until you’re in a better position to buy a home, it may be the ideal choice.
Options to Buy a House With No Money Down:
If you’re truly committed to purchasing a house with bad credit and no money down, you do have options. Here are some of the lenders and resources you can turn to when you’re trying to purchase your first home.
Some Credit Unions Offer This For First-Time Home Buyers
While it’s certainly not the standard and it may be hard to find a credit union that offers it, there are some credit unions that will help first-time home buyers purchase a property with no money down.
Keep in mind, however, that you will be subject to their individual terms, which may vary from credit union to credit union. Shopping around to see what your options are and considering the other resources on this list will help you make the best possible choice for your needs.
USDA Loans (0% Loans)
USDA loans are designed to help those in less densely populated areas (such as rural areas and small towns and suburbs) afford homes without having to pay money down.
USDA loans are actually quite accessible and cover about 91% of the country. Better yet, these types of loans are often offered at interest rates around 0.50% lower than rates on conventional loans.1
With all this in mind, USDA loans traditionally require you to have a credit score of 580 (although they may approve you if you have especially challenging circumstances that exempt you from this requirement).
However, aiming for a credit score of 620 or above is still ideal to help you improve your chances of approval.
VA loans are loans that are backed by the Department of Veteran Affairs and are designed for active-duty veterans and service members.
Those who qualify for VA loans benefit from extremely affordable loan terms, which makes it easier to find terms they can work with as they purchase housing. VA loans require no down payment but do generally need a credit score of at least 580 and a Certificate of Eligibility.
One of the lesser-known options for certain professionals is a physician loan.
Aptly named, physician loans are home loans designed to support doctors. They’re designed for all those with a D.O. degree, but may also be available for dentists, veterinarians, and even orthodontists in some cases.
Doctors may wish to leverage this unique loan because of their high debt-to-income ratio which can limit their ability to find stable housing after medical school and beyond. Better yet, this type of loan waves not only down payments but private mortgage insurance requirements as well.
The only potential drawback is the fact that many physician loans are not offered at a fixed-rate but are, instead, adjustable-rate mortgages. Make sure you think ahead and prepare for fluctuating mortgage rates that could affect your stability and income.
Should You Choose A No-Money-Down Mortgage?
As demonstrated by the above, those who have less money to spend on a house initially do have options. But it still comes down to the question, should you choose a no-money-down mortgage?
Ideally, no. Saving at least three percent for a down payment is a much better option.
With a downpayment, you’re able to secure better lending terms, chip away at the initial cost of purchasing the home (which can help you save money), and improve your chances of getting a mortgage with bad credit.
No-Money Down Pros
If you’re able to secure a better loan type and absolutely cannot put money down, a no-money-down mortgage might be just what you need to make your homeownership dreams a reality.
You’re also going to free up some cash by not putting money down on your home. This allows you to have some money put away for furnishings, necessary upgrades, and other unforeseen expenses.
No-Money Down Cons
- You’re going to pay more interest over the life of the loan, which means more money out of your pocket rather than being able to save with a down payment.
- You might not be able to afford as much home as you could with a mortgage that requires a down payment since it’ll be covering 100% of your purchase.
- You’re not going to have as much equity in your home.
- You might end up dealing with additional fees as a result of going this route, which only makes your home purchase that much more expensive.
- If you do take on too much risk, you might end up losing your home and face a worse financial situation than the one you’re facing currently.
Make sure to carefully weigh these pros and cons to determine whether or not buying a home with no down payment is the right choice.
Homeownership is a goal for most, regardless of whether they’re looking for a house they can call home or a property that they could potentially use to generate additional income.
However, homeownership may also be out of reach for some, making loan options with lower credit requirements and zero down payments a resource they can use to reach their goals. But is it the best choice?
For most, saving for a downpayment and working toward a better financial situation is the best route to take.
If you’re considering a no-money-down mortgage and have bad credit and other issues that bar you from owning a home, use this guide to weigh your options and craft a plan for the future.
Are Zero-Down Mortgages a Good Idea?
At a glance, zero-down mortgages seem like a steal. After all, you have to invest no money of your own upfront and can instead focus on putting your funds where you need them while getting the cash you need to buy your home.
But soon, the downsides of such a mortgage become apparent. From extra fees and insurance to higher interest rates and less desirable loan terms, you’ll discover why many people prefer to plan ahead for a home and make a down payment instead.
Overall, zero-down mortgages are not a good idea. It’s a much better idea to save up for a small down payment than it is to try to get your house price covered entirely by a mortgage loan. If you need a refresher on why, you can simply glance at the cons section up above.
Even if it’s a relatively low down payment by comparison, it’s still better than putting no money down. This will help you enjoy lower interest rates, reduce payments, and help you start your journey into home ownership with confidence.
What Is the Minimum Down Payment for a Mortgage?
Unless you are eligible for one of the no-money-down mortgages above (or even if you are), you’re going to need to put money down to secure a mortgage loan. But how much do you need to put down?
At the bare minimum, you can expect to put 3.5% down for an FHA loan, and 5% for a conventional loan.
If you do manage to find a no-money-down loan that you are eligible for, you still may be able to put money down to reduce interest and keep your payments down when you find a house that you want to purchase.
If you do have more money to spend and can afford a large downpayment on a house, you should consider putting at least 20% down in order to avoid private mortgage insurance so you have more money to spend on your new home.
There are a lot of considerations when it comes to buying a home, but all of this planning will ultimately benefit you while moving forward!
What Is the First Step to Buying a House With Bad Credit?
If you’re truly committed to trying to buy a house with bad credit, the first step is looking for mortgages that are willing to take you on (while keeping in mind the downsides that are going to accompany such loan options).
The best advice? Make it a priority to fix your credit now instead of trying to work around your low credit score.
With bad credit, you’re going to be severely limited by what you’re able to find, and you’re going to pay for it upfront. Better credit opens far more doors for you and makes it so that you can actually afford the type of home you want to purchase.
Put homeownership on the back burner, come up with a plan of action to help you address your current credit issues, boost your score, and set achievable goals and measurable milestones so that you can work towards owning a home of your own in the future.
The better prepared you are to purchase a home, the easier the experience is going to be for you.
Can You Buy a House With a 400 Credit Score?
620 is the lowest credit score you should be aiming to have when you decide to become a homeowner, although you may be able to find some mortgages that will consider credit scores as low as 580.
If your credit score is 400, there is no chance that you’re going to be able to find a lender willing to take you on. Instead:
• Determine why your credit score is so low and what you need to do to fix it.
• Look at the other areas of your financial life that need to be addressed so you’re in a better position to buy a home.
• Figure out how you can manage your existing debt to get you out of the hole and back on your feet.
• Avoid trying to go through the home-buying process now as it’s only going to result in hard inquiries that will bring your score down and rejections that will only continue to frustrate you.
Use this opportunity to fix your credit and work to where you can get a home with ease.
Dylan Buckley is a freelance finance writer and editor with 7 years of professional experience. Specializing in personal finance, cryptocurrency investments, and Fintech, Dylan is deeply passionate about creating content that helps readers make informed, confident financial decisions. He studied finance in college and maintains a credit score over 780.