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Mortgage interest rates have hit record lows, and as a first-time home buyer, you wonder if it's the right time to buy. The sticky part is that you are new to credit and have not had time to build a large enough credit file for lenders to judge your creditworthiness. Here, we'll discuss how to buy a house with no credit.
The short answer is yes. You can get a mortgage with no credit. It takes more work, but it can be worth the effort.
The difference between getting a mortgage with bad credit vs. getting a mortgage with no credit is all about reputation. Your credit score is based on five criteria, each with a different value assigned. For example, how long you've had credit (called "length of credit history") is worth 15% of your total credit score. How faithful you've been to paying bills on time (called "payment history") is worth 35% of your score.
When you apply for credit, mortgage lenders want to know more about you -- specifically, how you have managed credit in the past. The fastest, easiest way for a lender to peek into your credit history is to check your credit report. If you have bad credit, it's likely because you failed to pay bills as promised. Your credit score is your financial reputation, and all lenders have to go on as they make a decision regarding your loan application. If an applicant with bad credit is granted a loan, it will be at a higher interest rate. That's because lenders view applicants with bad credit as a risk, and charging a higher interest rate helps mitigate the risk.
When you have no credit history, lenders aren't sure what to think. You haven't yet built a financial reputation, and lenders have little upon which to base their decision. Qualifying for a mortgage with no credit is all about working with a lender that will allow you to prove your creditworthiness in a way that is less dependent on a credit score.
There are several ways to get a mortgage loan with no credit. One is to find a lender that will see beyond your credit score. Another is to look for mortgage options that don't rely as heavily on credit. And another is to build your credit history.
Lenders use underwriting to determine whether you are an acceptable credit risk and how likely you are to repay a mortgage loan. There are two types of underwriting: Automated or manual.
Automated underwriting uses algorithms to determine your application's quality. The computer program will flag your application if you don't meet the minimum credit score requirement. It recognizes a thin credit history, for example. It's as black and white as that. You either meet the lender's minimum standards, or you don't.
With manual underwriting, a real live person will study your unique financial situation -- even if very little of your history is recorded with each credit bureau. Manual underwriters can take other information into account, such as your rent and utility payments, to evaluate your payment history.
Manual underwriting is a process that allows a real person to determine your creditworthiness, often using criteria other than a credit score. If you want to buy a house with no credit, a manual underwriter is much more likely to approve your application.
Investigate all your mortgage options, which we'll cover below. Several of the government-backed loans cater to borrowers with limited credit as they allow lenders to manually underwrite loans.
If you want to land a conventional mortgage, you'll also need a lender that will manually underwrite your loan. Small lenders and credit unions are far more likely to employ manual underwriting than large, corporate lenders. The only way to know for sure is to call lenders and ask about their underwriting process.
As we discussed above, if you don't have a credit history, you'll need another way to show you'll repay your mortgage. That means not only paying all your bills on time, but also documenting your alternative payment history.
Whatever loan you apply for, you'll likely need to show your loan officer everyday payments going back several years, such as your rent, utility bills, and car payments. Make sure to pay all bills on time and in full. Keep receipts in a file you can easily access.
When it comes to how to buy a house with no credit, you might need to compensate by making a larger down payment. Squirrel away any extra money you can. Work out how much you can afford to save each month and consider setting up an automatic transfer into your savings account. The more money you have for a down payment, the more favorably lenders will view your loan application.
One way to make up for your thin credit file could be to ask a friend or family member with strong credit to cosign with you. Lenders will factor that person's credit score into their decision. Remember, if you ever miss a mortgage payment, your mortgage cosigner is on the hook for it. The loan will also show as a debt on their credit report. Do not ask anyone to cosign a loan unless you are convinced that you will never miss a payment. And be prepared to refinance your mortgage once you can qualify for a loan in your own right.
If your credit report is thin to non-existent, there are several mortgage options available.
As we've seen, you can snag a conventional mortgage with no credit, but it might be a long shot. You'll need to find a lender willing to consider an alternative payment history. Start with smaller mortgage lenders as they may be more lenient, and the service is likely to be personalized.
You'll need to show you have a history of on-time payments, so you should support your application with receipts for things like your car payment and rent. Be prepared to provide proof of income, and possibly also education. You'll likely need a high debt-to-income ratio (DTI) and solid down payment. The key to how to buy a house with no credit is take every opportunity to show the lender you are a reliable applicant.
In a nutshell: It may be challenging to qualify for a conventional mortgage, but conventional mortgages offer the lowest mortgage interest rates and some of the most reasonable loan fees.
FHA loans represent the best and worst of mortgage loans. In their favor, FHA loans are government-backed and easier to qualify for than a conventional loan. As long as you have at least 3.5% down, there's a good chance you will be eligible for an FHA loan. And, the FHA has a procedure for applicants with no credit. As with other loans, you'll need an FHA lender that is willing to underwrite your loan manually, so you'll need your proof of everyday payments.
Before you get too excited, though, FHA mortgages are more expensive than conventional loans. Not only will an FHA loan charge a higher interest rate than a conventional mortgage, but FHA loans are drowning in fees. You could pay thousands more over the life of a mortgage, simply because you took out an FHA loan.
In a nutshell: FHA loans are flexible but expensive. Consider working with an FHA lender only if you plan to refinance it into a conventional loan once you've had time to build a strong credit history.
If you're on active duty or a military veteran, a reservist or member of the National Guard, or the surviving spouse of a deceased veteran, you will be hard-pressed to find a more liberal loan program than one backed by the Veterans Administration (VA). A VA-backed loan requires no specific credit score, so it's up to individual lenders to decide whether to approve you. Lenders can use an alternative payment history to approve VA loans. Unlike FHA loans, there are no down payment requirements and you may not have to pay a higher interest rate.
In a nutshell: If you have access to a VA loan, compare it against a conventional lender to learn which one will cost less over the life of the loan.
It is possible to qualify for a USDA loan without a credit score, but, as with the other loans it depends on the lender. USDA loans are designed to help low income borrowers buy property in certain rural areas.
For applicants without a score, the USDA will accept a "non-traditional tradeline." Typically, it asks to see 12 months' worth of proof that you've paid other bills on time. Having several months' worth of housing payments in your bank account may also inspire USDA lenders to approve your loan.
In a nutshell: USDA mortgages -- designed for lower-income buyers in rural areas -- can be a good option for those just breaking into the housing market.
Mortgage rates are expected to stay relatively low for the foreseeable future, so if you're not ready to buy today, use that some time to build your credit. If you'd like to build a credit score to qualify for a mortgage loan (or any other loan type), here are some ways to make it happen:
Now we've covered all the steps in how to buy a house with no credit. It may not be easy, but we all have to start somewhere. Choose the mortgage type that works best for you, and you're on your way. Still have questions? For in-depth information on buying a home, check out our Home Buyer Checklist.
Yes, it is possible. The trick is to find the right lender and the right type of mortgage. Find a lender who will look at other factors -- bill payments, education, and income, for example -- to determine whether you qualify.
Pay all your everyday bills on time, save up for a down payment, and work with a mortgage lender that uses manual underwriting.
There's no set amount of time. It is possible to build a credit history in as little as six months. With a bit more time, you could build a good credit score. Still, if you don't have credit, it is possible to buy a house.
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
We've compiled a first-time home buying guides to help you confidently take the next step to land your best mortgage deal. Check out The Ascent's first-time home buyers guide for essential education.
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