Are you avoiding buying a home because you don’t have money saved for a down payment?
The good news is that there are loan programs that require no money down. The two main programs that allow 100% financing are for certain demographics, but if you are eligible, you can get a home with 100% financing.
The first loan program is the USDA loan. The USDA is willing to provide 100% financing for low to middle-income families. But, your income isn’t the only thing that makes you eligible for this loan program. You also have to buy a home in a rural area.
Before you think that this program isn’t’ for you, check out the USDA’s eligibility map. There are many areas of the United States that you may not consider rural, but the USDA does. They base the information off the latest US census tract. Areas with low population may qualify for USDA financing. This information is subject to change, so make sure you check the map right before you start looking for an eligible home.
Now let’s look at what you need to be eligible based on your income.
You can make too much money and not qualify for the USDA loan program. The USDA takes into account all sources of income in your household. This includes anyone that lives with you even if they aren’t on the loan. If you have grandparents living with you that collect social security or your adult children live with you and make an income, it all gets included.
The USDA will total up your monthly household income and then deduct the applicable allowances. They provide the following allowances:
- $480 for every child under the age of 18 living with you
- $480 for every child over the age of 18 and a full-time student living with you
- $480 for every disabled relative living with you
- $400 for every elderly person over the age of 62 living with you
Once you have your eligibility income, you can determine if you qualify for a USDA loan by discussing it with a USDA loan officer or checking your eligibility yourself here.
If you are eligible, you can get 100% financing on a house that is moderate for the area.
Qualifying for the USDA Loan
It’s not enough to be eligible for the USDA loan. You also have to qualify for it. The USDA has the following flexible guidelines:
- 640 minimum credit score
- 29% housing ratio
- 41% total debt ratio
- Stable income and employment
- No defaulted federal loans in the past
- Enough money to cover the closing costs
The USDA lender will review your documents to make sure you meet the above requirements. The lender will then send your file to the USDA for final approval. Upon approval, you can purchase your new home with no money down.
If you are a veteran of the military, Reserves, or National Guard, you may also qualify for 100% financing with the VA loan. In order to determine your eligibility, you must have an honorable discharge and served adequate time:
- Regular military members must serve 181 days during peacetime or 90 days during wartime
- Members of the Reserves or National Guard must serve 6 years
If you meet the above requirements, you can see if you qualify for a VA loan. The VA has some of the most relaxed guidelines out of any loan program. If you do qualify, you can borrow 100% of the cost of the home you want to purchase.
Qualifying for the VA Loan
The VA requires:
- 620 minimum credit score
- 43% maximum debt ratio
- Adequate disposable income for your area and family size
- No defaulted federal loans
- Stable income and employment
- Proof that you will occupy the home as your primary residence
If you meet the above requirements, you may be eligible to secure the VA loan and get 100% financing. The VA doesn’t require a second look at your loan file, as the USDA does. The VA underwriter has the power to underwrite the loan and approve it themselves.
Be Careful With 100% Loans
Even though it sounds great to have 100% financing, you may want to exercise caution. It can take you a while to build up any equity in the home, especially at first. Your payments typically go towards the interest for the first year or two. You will only pay a small amount of principal. This means you won’t build up equity until you start hitting the principal harder and/or your home appreciates.
This isn’t to say that a 100% loan isn’t worthwhile. It can be very helpful, but only if you plan to stay in the home for a while. If you know you will move in a couple of years, getting your head out from underwriter might be difficult and you could find yourself bringing money to the closing just to sell your home. In the right situation, though, a no down payment loan can be a blessing in disguise.