Can you get a mortgage with a low credit score and no down payment?
Buying a home with no down payment can be challenging and so can qualifying for a mortgage with a low credit score. When you combine the two, the challenge may seem insurmountable but that is not the case. Below we explain how to qualify for a mortgage with both a low credit score and no down payment.
First, we review how to buy a home with no money down. Your best option is to combine a low down payment mortgage program with a down payment grant. With this approach, although technically you are still required to put money down, the source of funds for your down payment comes from a grant or other homebuyer assistance program.
For example, let’s say you want to buy a home for $100,000 and the mortgage program you use requires a 3% down payment. In this case you obtain a $97,000 mortgage and apply for a $3,000 down payment grant. The combined mortgage and grant enable you to purchase the home for $100,000, and meet the down payment requirement for the mortgage, but the money for the down payment comes from the grant instead of your own funds. So you effectively buy the home with no money down, or more specifically, no personal financial contribution.
Example: How to Buy a Home with No Personal Financial Contribution
Property Purchase Price: $100,000
Maximum Mortgage Amount: $97,000
Down Payment Required: $3,000
Down Payment Assistance Grant: $3,000
Homebuyer Personal Financial Contribution: $0
It is important to highlight that you are also required to pay closing costs and potentially hold savings in reserve when your mortgage closes, which can be significant expenses, but this example demonstrates how to use a down payment assistance program to buy a home with no money down out of pocket.
Review How Down Payment Assistance Programs Work
Down payment grants and other homebuyer assistance programs are usually provided by HUD-approved state and local housing agencies. You can visit the HUD resources website to learn more about the programs available in your state.
In addition to using a down payment assistance program, you may also use a gift from a relative or friend or an employee assistance program offered by your company to help pay for all or part of your down payment.
Now that you understand how to buy a home with no financial contribution, the next step is to select a low down payment mortgage program that applies more flexible qualification guidelines so you can qualify with a low credit score. The financing option that is right for you depends on your specific credit score and other factors but there are certain programs that are better matches for credit-challenged applicants including the FHA and HomeReady programs.
The FHA Mortgage Program enables you to qualify for a mortgage with a credit score of 500 if you make a down payment of 10%, all or part of which can be paid for with a down payment assistance program. If your credit score is at least 580, you are only required to make a down payment of 3.5% of the property purchase price, which makes it easier to buy a home.
Use ourFHA MORTGAGE QUALIFICATION CALCULATORto determine the FHA loan you can afford
The credit score required to qualify for an FHA mortgage is lower than the score required to qualify for other low down payment loan programs. Additionally, applicants with a low credit score due to insufficient credit usage may be able to qualify for the program by working with their lender to submit a non-traditional credit profile.
Review our FHA Mortgage Guide
The downside of the FHA Program is that you are required to pay an upfront and monthly mortgage insurance premium (MIP), which are additional costs on top of your closing fees and mortgage payment. FHA mortgage insurance is non-cancellable which means you are required to pay it for the life of your loan.
FHA mortgages are provided by approved lenders including banks, mortgage brokers and credit unions. The table below shows mortgage rates and fees for leading FHA lenders in your area. We recommend that you contact multiple lenders to determine program availability and to find the best loan terms.
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The HomeReady Mortgage Program requires a minimum credit score of 620 and a down payment of only 3%, which again you can pay for with a down payment grant. Applicants with limited or no credit history may also be eligible for the program. The HomeReady Program also enables you to use non-traditional income sources including income from a non-occupant co-borrower such as a relative or boarder income to qualify for a mortgage.
Review our HomeReady Mortgage Guide
If you make a down payment of less than 20% you are required to pay monthly private mortgage insurance (PMI) with a HomeReady loan but there is no upfront fee and the PMI is cancellable when your loan-to-value (LTV) ratio reaches 78% to 80%. The ability to eliminate your monthly PMI fee is a significant advantage of HomeReady compared to an FHA mortgage.
The HomeReady Program is provided by participating lenders. HomeReady mortgage rates tend to be higher than FHA rates but the closing costs are usually lower. We recommend that you contact multiple lenders in the table below to learn more about program availability and qualification guidelines. Like with all mortgage programs, it is important to shop multiple lenders to find the lowest interest rate and fees.
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The final program to consider is the NACA Mortgage Program which enables you to buy a home with no down payment or closing costs. Instead of requiring a minimum credit score, the NACA program uses a character-based applicant credit review process which makes it a good match for borrowers with lower credit scores.
Review our NACA Mortgage Guide
The NACA Program is only offered by NACA and program availability is limited to certain states. The NACA application process is also different than other mortgage programs and you must fulfill an annual community advocacy requirement after your loan closes. You can learn more about the program by visiting the NACA website.
In closing, buying a home with no down payment and a low credit score is challenging but not impossible. With the right mortgage program and lender you may be able to own a home sooner than you think despite having both limited funds and credit challenges.
Sources
"Let FHA Loans Help You Buy a Home." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
"HomeReady Mortgage." Mortgage Products. Fannie Mae, 2020. Web.
"NACA Purchase Program."  NACA. Neighborhood Assistance Corporation of America, 2020. Web.
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