How to get a mortgage even if you don’t have a credit history
If you’re thinking about buying a home, you probably know that having a good credit rating will help you get approved for a mortgage at today’s historically low rates.
But what if you don’t have a credit score?
Turns out, while the mortgage application process is a bit more complicated, you still have options.
The difference between “no credit” and “poor credit”
When it comes to getting a mortgage, it’s important to know the difference between “no credit” and “poor credit”. And in order to do that, you must first understand what a credit score is.
In short: a credit score is a number that helps lenders determine how risky it is to lend you money. There are many types of credit scores, but the most widely used is the FICO score.
If you’ve never had a line of credit before, you might think your credit score is zero, but it isn’t. In fact, you have no credit score. For your credit score to be calculated, you must have credit in your name (eg, car loan, student loan, credit card, etc.) for at least six months.
Typically, your starting credit score will be in the “correct” range, between 580 and 669. You can see that for yourself, because today it is easy to get a credit score. take a look at your credit score for free.
Not having a credit score is very different from having a low credit score. A low score means you borrowed money and failed to pay it back. This is a red flag for lenders and it is more difficult, but not impossible, to get a mortgage.
So, can you get a home loan without credit?
You certainly can.
Remember that the main purpose of your credit score is to help prove your creditworthiness.
While having a low credit rating shows lenders that you are not creditworthy, having no credit rating just means you have to prove your creditworthiness in other ways.
Getting a mortgage without a credit history
Lenders use computer algorithms to help them process mortgage loan applications. They need this help because the ultra-low mortgage rates of the COVID era have brought lenders a flood of requests.
If you are a low-risk borrower with a high credit score, stable income, low debt-to-income ratio (DTI), and a large down payment, algorithms can approve your loan quickly.
If you don’t have a credit history, the process is a bit more tedious. Instead of being approved by a computerized template, you must have your application manually subscribed.
What is manual subscription?
When underwriting manually, lenders do not rely on computer programs, but personally examine your ability to pay off a mortgage. They put your finances under a magnifying glass to determine if you can be trusted to pay off your loan.
There are several things you can do to pass this inspection. You will want :
1. Provide proof of the reliability of the payment.
You might not be used to paying off loans, but you are used to paying other bills on time. To demonstrate the reliability of your payment, you will need to gather 12 months of payment history for two to three different recurring expenses. One of these expenses must be a housing expense, while the others could include:
In addition to your payment history, you will also need to submit documents showing two years of regular income. This usually means pay stubs, W-2 forms, and tax returns. If you are self-employed, you may also need to provide an income statement.
2. Make a big down payment.
One of the best ways to make up for a lack of credit history is to put more money aside.
If you are able to put 20% down, it will prove to your lender that you are responsible enough to save money. Not only that, but you won’t have to pay mortgage insurance if you take out a conventional loan.
A 20% deposit isn’t always essential, but the more you put in, the higher your chances of getting approved.
3. Opt for a conventional 15-year mortgage
As you will see shortly, there are government loans specifically designed for those with poor or no credit. And while these may be easier to qualify, they are more expensive in the long run.
If you have an income that is high enough to pay the monthly payments, you will end up paying a lot less over time with a conventional 15 year mortgage.
Buying a No Credit Home with an FHA Loan
If you don’t qualify for a conventional home loan, you can take out an FHA loan to buy a home without credit.
A FHA loan is a mortgage insured by the Federal Housing Administration. Since these loans are guaranteed by the government, they allow lenders to approve mortgages for riskier borrowers, including those who do not qualify for conventional loans due to their credit history.
This makes an FHA mortgage particularly attractive to first-time home buyers, although regular buyers can use them as well.
How Does an FHA Loan Work?
Unlike conventional mortgages, which typically require a credit score of 620 or higher, you can get approved for an FHA loan with a score as low as 500, or even no credit score.
Just like with a conventional loan, your application will be taken out manually and you will need to present a solid history of paying your bills on time.
Depending on your credit, you can take out an FHA loan for as little as 3.5% to 10% down payment.
So far, that seems like the perfect solution, doesn’t it? There is only one catch.
Is an FHA loan a good idea?
With a mild credit score and down payment requirements, FHA loans may seem like an attractive option at first glance.
But if you calculate the numbers, you will find that they may not be all they are meant to be.
This is mainly due to the mortgage insurance premiums (MIP) of the loans. With a classic loan, you owe pay mortgage insurance until you accumulate 20% equity in your home. But with an FHA loan, you may have to pay the MIP permanently.
If you put less than 10%, you will pay annual mortgage insurance premiums for the life of the loan. If your deposit is more than 10%, which is recommended, you will still have to pay the MIP for 11 years.
In the long run, this makes FHA loans considerably more expensive than conventional loans. That said, if you need to buy a home, can’t get approval for a conventional loan, and you don’t have time to build your credit score, an FHA loan may be a good idea. excellent last resort.
How to buy a house with no credit and no down payment
Believe it or not, it is possible to buy a home with no down payment or credit history. But qualifying for a mortgage will be difficult, and you will likely end up with adverse conditions.
One option is to apply for a USDA loan. These loans are insured by the United States Department of Agriculture and allow low and moderate income people to purchase fully financed homes with no credit requirement. The catch is that these loans are only good for rural properties and some suburban properties.
If you have served in the military, another alternative is a VA loan.
VA loans are backed by the federal government and have no minimum credit score or down payment requirements. However, you will have to pay a one-time VA financing fee.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.