What Credit Score is Needed to Buy a House With No Money Down?

What Credit Score is Needed to Buy a House With No Money Down?

If you otherwise meet the qualifications for a no money down home loan, you may be wondering what kind of credit score you’ll need to receive approval. 

While no money down loans are backed by a third party that takes on much of the default risk, the loan itself is still issued by a bank. The bank will have its own credit score and credit report requirements for approving your home loan. 

Because of this, the minimum score required can vary by loan type and lender. A credit score of at least 620 is a good starting point. Just be aware that some lenders may require a score of 640 or even 700, depending on the loan type. 

If you have a bad credit score that doesn’t yet meet this minimum, there are other low down payment home loans with credit score requirements as low as 500. 

What Credit Score is Needed to Buy a House with No Money Down?

The exact credit score needed will depend on the type of loan and your financial situation, but generally speaking, the minimum score required for a no money down loan is 620. There are many different types of no money down home loans to choose from, each with its own set of unique requirements. 

But all of them are backed by some sort of agency or associate who takes on the risk if the borrower chooses to default on their loan. This makes these types of loans more attractive to the banks who won’t need to bear the full burden of loans. 

For you, the borrower, this means you often don’t need as high of a score required by a conventional loan. You can also usually qualify for better interest rates as well. 

But your credit score won’t be the only factor. The bank will also evaluate your credit report and financial situation as a whole before approving the loan. 

Related article: How Much of a Home Loan Can I Get with a 650 Credit Score?

Types of No Down Payment Home Loans and Their Credit Score Requirements

There are several types of zero-down payment home loans out there on the market. Each has its own credit requirements as well as other financial requirements. 

It’s important to note that while no down payment home loans are usually backed by a government entity or other agency, they are still issued through regular lenders/banks. 

Each bank may have its own specific requirements, which could include higher credit score requirements, set debt-to-income ratios, and other standards regarding your credit report. 

So if you are struggling to get the ball rolling on a mortgage loan at one bank, you can always try using a different mortgage lender for your zero-down mortgage loan. 

Below, we’ll cover 3 of the most common types of no money down mortgage loans. 

VA Loans – 620 Minimum

A no money down VA home loan is offered by the US Department of Veterans Affairs. 

In order to apply for a VA loan, you (or your spouse) will need to meet specific military service requirements: 

  • Served 90+ consecutive days during wartime
  • Served 180+ days during peacetime
  • Served 6 years in the national guard or reserves
  • Spouse died during military duty
  • Spouse died as the result of a service-related disability

There are also special considerations if you were discharged early due to health concerns, hardship, or a government-issued reduction in force. 

The service requirements apply to any branch of the military including the Army, Navy, Air Force, Marines, or Coast Guard. 

You will also need to obtain a COE (Certificate of Eligibility) to prove you are eligible for a home loan with the VA. 

Once you’ve verified eligibility, you will then need to meet the bank’s standards for issuing a loan. 

Generally speaking, a VA loan requires a minimum credit score of 620, but many lenders will require a credit score closer to 640 before they issue a loan. 

If your score is in the low 600s, you may want to talk to the bank before you start the application process to find out what their minimum score requirements might be. 

USDA Loans – 640 Minimum

This type of loan is backed by the US Department of Agriculture and was designed to help those wishing to build/purchase a home in areas designated as rural.

This loan comes with requirements for both the borrower as well as the actual home. 

Income limits are placed on the borrower depending on the size of their family. A family consisting of up to 4 members can have a household income of up to $91,900 while a family of 5-8 can have an income of up to $121,300. 

As for the house, it must be located in an area that is defined as rural. You’ll need to verify with the USDA whether your home qualifies, but generally speaking, the maximum population for the area cannot exceed 35,000. 

It is also important to note that the property has to be your primary residence, and cannot be an investment property or a farm. Although they do make exceptions for properties that come with farming implements that are not intended to be used for farming (i.e. barns or chicken houses). 

The minimum credit score required for this type of loan is largely dependent on the bank/lender. Smaller banks and credit unions in rural areas often have slightly different minimum standards. But generally speaking, you’ll need a credit score of 640 for a USDA loan. 

Physician Loans – Minimum Score Varies

Physician loans are just that, home loans designed with physicians and future physicians in mind. 

Medical school is not cheap, and student loans for med students average near $207,000.

And once a doctor completes medical school, they’ll still need to do their residency before they can move on to their own office/practice. 

The high amount of debt coupled with low-ish starting wages (residency) makes these future doctors poor candidates for traditional loans. They often have lower credit scores and their debt-to-income ratio is pretty abysmal. 

This is where Physician loans come into play. These loans allow for higher amounts of debt under the premise that a fully licensed doctor will eventually be able to bring in more than enough income to pay the loan. 

To qualify for the loan, you’ll need to show proof of your MD or DO degree, although some lenders also extend these loans to dentists, orthodontists, and even veterinarians. 

As these loans are not backed by any kind of agency, the bank is the one taking all the risk, so they are the ones who set the credit score requirements. Because of this, the minimum credit score required varies greatly between lenders. 

Reported minimum credit score requirements for this type of loan range from 640 all the way up to 720. So it is a safe bet that you will probably need either a good credit score or a high income to qualify for this type of loan.

Related article: How to Fix My Credit to Buy a House

Low Down Payment Loans with Credit Score Requirements

If you, or your house, don’t qualify for any of the no money down options above, there are still plenty of low down payment home loan options available. 

Surprisingly, the credit score requirements on these loans aren’t much different from the requirements on the no money down mortgage options. 

But, you will need to provide that down payment money upfront. The minimum down payment required varies between each loan, starting at 3% of the home price and reaching 5% or higher. 

Only one of the loans on this list is backed by an agency, the FHA home loan. All of the others are solely backed by the lender. This means a low down payment will require mortgage insurance and potentially higher interest rates when compared to the no money down options. 

FHA Loans – 580 Minimum

This mortgage loan has the lowest credit score requirement of any other loan on the list, but the tradeoff is a higher down payment requirement. 

Traditionally, an FHA loan, which is backed by the Federal Housing Administration, requires a down payment of at least 3.5% of the home’s purchase price. So for a $300,000 home, the minimum down payment would be $10,500.

To qualify for this loan, the FHA lender will require a credit score of at least 580. 

If you have a credit score lower than that, you may still qualify for an FHA loan, but you’ll need to put up a substantially higher down payment. For a bad credit score of 579 or less, a 10% down payment is needed, so $30,000 for a $300,000 home. 

Two things to keep in mind are first, an FHA loan (with a low down payment) will require you to carry mortgage insurance and second, the lower your score, the higher your interest rate. 

These two things can add a significant amount to your home’s overall purchase price and monthly payment, making this type of mortgage much less attractive when compared to a conventional loan. 

Fannie Mae HomeReady Loans – 620 Minimum

This type of loan program is designed with low-income homebuyers in mind. 

To qualify for this loan, your household income must be below the median income for your area and/or the home you wish to purchase must be in an area designated as low income. 

Your credit score will need to be at least 620 or higher. If you apply for the loan with a higher credit score, around say 680, you will likely qualify for more favorable interest rates. 

The minimum down payment for this type of loan is 3%. So a $100,000 home would require a down payment of $3,000. 

You can offer more than the minimum down payment, and if you are able to provide at least 20%, you’ll be able to skip the mortgage insurance requirement.

Freddie Mac Home Possible Loans – 660 Minimum

This loan is similar to the HomeReady loan in that it is designed for homebuyers and neighborhoods that qualify as low-income. 

The income restrictions on this loan are a little more stringent. To qualify, your household income cannot exceed 80% of your area’s median income. So, if the median household income in your area is $60,000, then your household cannot exceed $48,000 in income. 

The credit score requirement is also a bit higher when compared to the HomeReady loans. For the Home Possible loan, you will need a minimum credit score of 660.

It is also important to note that if you are a first-time homebuyer, then you will need to go through their homebuyer education course in order to qualify for the loan.

Related Article: Is It Better to Put a Large Down Payment on a House?

Conventional Loans With PMI – Minimum Score Varies

This is the most common type of home loan issued throughout the US. 

A conventional loan requires a minimum of a 5% down payment, which is higher than any of the other mortgage options on this list. For a $300,000 home, 5% amounts to $15k. 

This loan also comes with the dreaded PMI or Private Mortgage Insurance. Although, it is important to note that many of the other options on this list also require some kind of mortgage insurance, including the no money down USDA loan. 

As for the credit score requirements, this can vary by bank, although generally speaking, the minimum to qualify would be 620. 

With this type of loan in particular, the higher your credit score, the more likely you are to get approved for the loan and the lower your potential interest rate will be. 

FAQs

Can cash gifts be used as a down payment?

This depends on the loan type. Both the HomeReady and Home Possible loans allow you to use up to 100% gift funds or payment assistance for the down payment. 

For an FHA mortgage, you can also use gift funds to cover the down payment, but you’ll need a letter from the gift giver stating that the money is indeed a gift and that they don’t expect repayment in order to comply with FHA guidelines. 

The rules for gift funds on a conventional loan are a little more stringent. First, the donor has to be a relative that is willing to provide a gift letter. Other loans allow employers, charities, payment assistance programs, and even friends to gift you down payment funds.  

Second, if the value of the home loan is greater than $548,250, or the home is a second home, you’ll need to provide the 5% down payment out of your own pocket and the gift funds will just be added on top of your down payment. 
You can also accept gift funds for no money down loans if you want to start out with some equity in your home. 

What are the benefits to putting more money down?

Equity is the primary benefit. The more money you put down, the less you owe on the home. This helps to protect you from being underwater on your mortgage (owing more than your home is currently worth). 

A larger down payment can also be beneficial in other ways. It can land you a lower interest rate, or, if you have poor credit, it can increase your chances of approval. 

And if you are applying for a loan that usually requires mortgage insurance, being able to put more money down can get you to the threshold for canceling that mortgage insurance sooner if not waive the requirement entirely (putting down 20% or more).

Do I need to pay mortgage insurance if I make a low down payment?

Yes, and the premium will be automatically added to your monthly mortgage payment.  

Most home loan products require you to carry some type of mortgage insurance until you reach a minimum of 20% equity in your home, at which point, you can cancel the insurance. 

For an FHA loan, instead of mortgage insurance, you’ll need to pay a mortgage insurance premium every month. This is essentially the mortgage insurance you would have on a typical loan, but divided up and stretched out for the full duration of the loan (i.e. 30 years). 

A USDA loan has a guarantee fee instead of mortgage insurance. You’ll pay part of the fee upfront (1% of the home’s purchase price) and then a much smaller annual fee for the duration of the loan. 

A VA loan has no mortgage insurance requirement. But they do require a funding fee that helps support the program for future borrowers. 

The VA loan fee starts at 2.3% for first-time borrowers and decreases if you put up a down payment of 5% or more. But it can be waived for veterans with disabilities, purple heart recipients, and spouses of deceased veterans. 

Are zero-down mortgages a good idea?

A zero-down mortgage is a bit of a double-edged sword. On one side, you can get into a house now without waiting years to save up enough money for a down payment. 

But on the flip side, you are beginning homeownership having zero equity in your home. This could set you up for being underwater on your loan and being forced into foreclosure. 

Waiting until you have enough money saved up for at least a 3% – 5% down payment would be better. Or see if you can qualify for funds from a payment assistance program.  

That said, if you qualify for one of these no money down types of mortgage loans, the actual loan product in most cases is better than getting an FHA loan or conventional loan. 

The approval rates on these loans are higher (even with bad credit) and the interest rates are usually lower. 

So, if you can afford a 5% down payment, it would still be better to choose, say a VA loan over an FHA, so long as you put that money as a down payment. 

But, if you can afford to put down at least 20% of the home price, you are much better off going with a conventional mortgage so that you can bypass any mortgage insurance requirements.

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