The first thing you likely hear about applying for a mortgage is that you need good credit. What if you don’t have a credit history, though? Are you out of luck?
Luckily, you are not out of luck. However, you will have to prove your worthiness for the loan in other ways. Lenders use your credit score and history to determine your level of financial responsibility. Without a history, how do they know how well you pay your bills?
It’s kind of a catch 22. You don’t want to be in debt so that you can afford the mortgage, yet without a credit history, some lenders may not talk to you. There’s a fine line you must walk when you do have debts – you want just enough to show financial responsibility, but not so much that your debt-to-income ratio is too high.
If you are among the thousands of Americans that don’t have any type of credit score, you may still get a mortgage, just with non-traditional credit.
What is Non-Traditional Credit?
Chances are that you pay someone some amount of money on a regular basis. Whether it’s your landlord, insurance agent, or the utility company – someone gets a check from you around the same time each month. You can use those accounts to your advantage when you need to prove you are worthy of a loan.
You’ll need a payment history, just as you would have if you had traditional credit, such as credit cards or car loans. If the person/company you pay does not send the information to the credit bureaus, you can ask for a Verification of Payment from them. If they confirm that you make a specific payment on a certain date each month for at least 12 months, it may help. You’ll also need to provide further proof with your bank statements or canceled checks.
Try the FHA Loan With No Credit History
If you don’t have a traditional credit history, the FHA loan may be your best bet. The FHA does not reject loans just because a borrower does not have a credit history. They don’t determine a borrower’s ability to handle a mortgage on the fact that there isn’t any credit. It could be the borrower’s choice not to get into debt. If a borrower were to rush out and take out a few credit cards and/or installment loan, it would harm their credit score more than help it.
Rather than declining loans, the FHA gives the option to use non-traditional credit. Generally, lenders require at least 3 non-traditional trade lines. In general, the FHA requires:
- A timely rental payment history for at least 12 months
- Proof of timely payments for utilities
- Proof of timely payments for insurance
Any of the trade lines you choose should have timely payment histories. At the most, one 30-day late payment may be allowed, but it’s best if it’s not on your rental history. Your housing payment history plays an important role in the lender’s decision.
The FHA will also look at other qualifying factors, such as the stability and amount of your income; the stability of your employment; and your debt ratio. The higher your income and the lower your proposed mortgage payment are, the better your chances of approval.
Finding a Lender
The trickier part may be finding a willing lender that will accept your application with no credit history. It’s not impossible, but you might not be able to find a mortgage with the ‘big-name’ lenders. Instead, shop small. Check out smaller and more independent lenders that tend to be a little more forward-thinking in their underwriting rather than so black and white.
FHA Loan is a Great Option
If you can get yourself approved for the FHA loan, it’s a great way to start your homeownership. You’ll enjoy a low 3.5% down payment and flexible underwriting guidelines. Your down payment may even come from a relative or your employer – it does not have to be your funds.
The FHA loan does require an upfront funding fee and annual mortgage insurance, though. Make sure you work that into your payment to make sure your payment is affordable.
Not having a credit history doesn’t mean you are out of luck. It just means you must think outside the box. Shop with several lenders and see which one not only will accept your lack of credit, but also will provide the best terms and rates for your loan.