I’m an Unconventional First-Time Home Buyer. Can I Get a Mortgage?

We all come with unique situations when it comes to qualifying for a home loan. Sometimes it is easy to feel like the odds are stacked against us – but this isn’t necessarily true!

As a borrower, you have a few options to consider when seeking out a lender.

Let’s explore some common scenarios and how to handle them.

No Savings Homebuyers

You may also hear the term “no down payment home loans” when searching for home loans, but, the question is, what does that label really mean?

Essentially, no down payment loans mean that the borrower will have to put no or relatively little cash up front to complete the closing on their home.

Some common options for no down payment loans include:

• Zero-down government-backed VA or USDA loans.
• Down payment assistance from state, local, or nonprofit agencies used to cover the down payment.
• Asking the seller to pay your closing costs (“seller concessions”).
• Receiving a down payment gift from a family member.
• Asking the lender to pay your closing costs (“lender credits”).¹

You normally can't get a loan unless you prove you also have capital or cash to cover the closing costs and the down payment combined. Lenders also like to know that you have a little cash stashed away for a rainy day in case your income source suddenly dries up or you have an emergency like a car breakdown or the need for a root canal.

Really, when looking at your account balances, home loan companies are looking to make sure that you have enough cash in the bank to cover a few different things:

• Closing costs (Usually around 3% of the home’s price).
• Down payment (Usually at least 3.5%).
• Extra in case of emergencies and to live from.²

By considering your options, you give yourself buffer space to make the best decision for your financial situation.

Bad Credit Homebuyers

Home loan lenders will look at one piece first no matter who you speak with – your credit score, the three-digit score assigned to you based on the likelihood that you will pay your bills (credit card, auto loans, home loans, personal loans) on time.

There are also a few basic facts to know:

• Your credit score can range up-down by a few points depending on each of the three credit bureaus.
• There’s no guaranteed credit score that will necessarily get you what you’re looking for – having a high credit score doesn’t guarantee you better loan approval odds or better interest rates, as an example.

Credit scores aren’t always the be-all-end-all, though. Sometimes a lender will use your credit score more specifically to set the interest rate on your loan, for example.

Let’s look at the potential range of scores:

• 800 to 850: Excellent

These borrowers are sought-after by lenders. They are considered to be low-risk borrowers and have a long credit history of accounts in good standing, making it easier for them to get new credit and loans with lower rates.

• 740 to 799: Very Good

In this range, borrowers have a detailed credit history made up of positive behaviors – they may find it easier to be approved for additional credit.

• 670 to 739: Good

Lenders generally won’t hold this score range in too much concern. Borrowers in this range are considered little to no risk.

• 580 to 669: Fair

These borrowers are often called “subprime” borrowers. Many lenders will label them as higher risk, making it a little harder for them to qualify for or get new credit.

• 300 to 579: Poor

Borrowers here will likely need to take steps to improve their credit score before being approved for a new credit line or loan, even though it is still possible to be approved. While tactics vary, they often include paying down or off existing debts, closing unused accounts, and making payments on time.³

Grant-Using Homebuyers

Grants are unique in that situations when they aren’t added on as second mortgages (which is common) they act, essentially, as “gifts” – the money is given and can be put to use toward the agreed-on part of the mortgage loan such as the down payment or closing costs.⁴

Common grant programs include:

• Regional, state, and local grant programs. For example, many states have an affordable housing office that offers down payment assistance loans for first-time homebuyers on family homes.
• Federal programs such as VA and USDA loans include similar features such as no or lowered down payment amounts even if they aren’t explicitly grant programs.
• The National Homebuyers Fund offers a certain percentage of payment assistance based on the loan amount that can be used for a down payment, closing costs.

Freelance and Gig-Worker Homebuyers

Our world has changed so much in the past few years, including the ways we work – most of us have “side-hustles” and jobs on the side, and that’s great, but if your main income comes from operating your own business or working side jobs, you may face difficulty when it comes to qualifying for a mortgage loan.

No sweat, though – there are ways to make the situation work for you.

1. Be ready to put down a larger down amount – Lenders like to see borrowers putting more than the minimum down amount on a loan, as it shows a commitment to paying the loan amount off early or on time – paying a larger amount also reduces the amount of money needed to finance cost of the home, bringing down the monthly payments and risk for the lender if a default/foreclosure happens on the loan.
2. Work to boost your credit score – Of course, working to boost your credit score will have an immediate impact on how much home you can afford to finance, as well as the willingness of a company to offer you a loan – after all, your credit score shows that you are able to, and have, paid your debts on time.
3. Freelance for a few years ahead of qualifying – As a freelancer, you are effectively your own business. Loan companies like to see that you have been freelancing for a while, showing dedication, and that the amount you’ve brought in has increased over time. Most loan programs will ask for two years, but three is advisable to show steady income and growth.
4. Get a guarantor – Someone who signs your loan with you to pick up the responsibility should you not be able to pay your bills.⁵

Sources:

1. Can I buy a house with no savings? (financeband.com)
2. Closing Costs for the Buyer: How Much Are They? (thebalancemoney.com)
3. What are the Different Ranges of Credit Scores? | Equifax
4. First-Time Homebuyer Grants and How They Work (thebalancemoney.com)
5. 5 Tips for Applying for a Mortgage as a Gig Worker | The Ascent (fool.com)