Does the lack of a down payment keep you from securing a mortgage? You aren’t alone. The down payment keeps many people from buying a home. What if you were able to secure a 100% mortgage, though? Would it change your mind?
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Some people will be lucky enough to obtain a 100% mortgage through either the USDA or VA. Keep reading to see if you may be eligible.
The USDA Loan
The USDA loan is a rural mortgage program meant for low to moderate-income families. If your total household income is less than 115% of the average income for the area, you may be eligible for the program. If you qualify, you must purchase a home in a ‘rural’ area. The USDA’s definition of rural may surprise you, though, as it’s not only areas surrounded by cornfields. In fact, many of the areas they allow are right outside of the city limits.
The USDA loan has flexible underwriting guidelines as follows:
- Minimum credit score of 640
- Maximum housing ratio of 29%
- Maximum total debt ratio of 41%
- Stable employment and income for the last 2 years
- No defaults on federal loans in the recent past
Along with all of these flexible guidelines, you get the benefit of a 100% loan. You don’t have to put any money into the loan, but you do have to pay closing costs, unless the lender or seller pay them for you.
The USDA loan does have an upfront mortgage insurance fee and an annual mortgage insurance fee. The upfront fee is 1% of your loan amount and the annual fee is 0.35% of the outstanding principal balance. You pay this insurance for the life of the loan.
Once you know you are eligible for the USDA program, you can start shopping around with different USDA lenders. Don’t assume you have to use the first lender you find. Every USDA lender has their own requirements and charges their own fees. Comparison shop to see which lenders offer the best deal.
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The VA Loan
The VA loan is for veterans of the military, Reserves, and National Guard. If you served at least 90 days during wartime; 180 days during peacetime; or 6 years in the Reserves or National Guard, you may be eligible for the program. All that the VA requires in addition to your time in service is an honorable discharge. If you meet these requirements, you may be eligible for the VA loan.
The VA also has flexible underwriting guidelines including:
- Minimum credit score of 620 (some lenders may require a higher score)
- Maximum total debt ratio of 43%
- Stable employment and income for the last 2 years
- No defaults on federal loans in the recent past
- Proof that you have adequate disposable income after you pay your monthly obligations
The VA also offers a 100% loan. They also allow the seller or the lender to pay your closing costs. In some cases, you may even come to the closing table with no money of your own.
The VA only charges a funding fee – they do not require veterans to pay mortgage insurance. The funding fee is 2.15% of the loan amount for veterans of the regular military and 2.4% of the loan amount for veterans of the National Guard or Reserves.
The VA makes the rules, but the VA approved lenders are the ones that actually fund the loans. This means some lenders may have ‘overlays’ or extra rules that they require in order to fund a VA loan.
You are free to shop around with any VA-approved lender to find the one that will give you the best deal on your mortgage.
If you don’t have a down payment, you may still get a mortgage. You need to find the program that you fit into and then find a lender that will approve you for the loan. Do a little window shopping and compare your options from several lenders before you settle down so that you know you are getting the best loan possible.