It is possible to live with no credit when you are a student who is just starting out. You could also be someone who uses only debit cards and has no recent credit history. Does this mean you can’t buy a house? The truth is, it can be challenging for first-time homebuyers to obtain a mortgage, and even harder if you do not have a credit history.
But, don’t fret if you are in this position because it is possible to buy a house even with no credit. Keep reading to learn how you can do it.
What is credit?
Having credit allows you to borrow money when you need it. If you’ve come across people talking about building credit, it means they are taking steps to show that they pay back the money they borrowed as agreed.
You must know about the three major pieces of your credit and learn how they fit together to help you qualify for a mortgage.
1. Credit history – Your credit history is a record of loans or credit cards in your name taken out in the past. Mortgage lenders review your credit history to see the types of credit you have taken in the past and how you handled them.
2. Credit report – Your credit report captures all your credit history details, and the documents may include:
- Each type of credit account you have taken out.
- The history of each payment you have made and whether they were made on time.
- The reported account balance.
- Other public records such as bankruptcies and foreclosures.
You can obtain your credit report from the three major credit bureaus, Experian, Equifax, and TransUnion, which collect all the information about your accounts and add the details to your credit report.
3. Credit score – Credit scoring companies periodically scan your credit reports and use the information to calculate your credit score. You can easily buy a house with a good interest rate if your FICO score (which ranges from 300-850) is high.
What differentiates having no credit from bad credit?
When your credit report lacks ample information to calculate your credit score, it means you have no credit. It is also recognized as having a “thin credit file” or being “credit invisible.”
This happens when you have:
- Never applied for a loan or a credit card.
- Borrowed money but your creditors failed to report your account information to the three main credit bureaus.
- Paid off your loans two years prior and have not opened any new accounts.
A thin credit file makes it difficult for creditors to determine a borrower’s likelihood to repay debt. The federal government’s estimate shows that 1 in 10 adults have no credit history with any of the credit bureaus.
Anyone with a score of 640 or lower is considered to have bad or poor credit. The standard credit score range looks like this.
Beware of any negative events such as bankruptcies and foreclosures that can easily hurt your credit. A low credit score can be a warning sign for the lenders who may think that you can default on paying your mortgage at some point.
How to obtain a mortgage with no credit
Potential homebuyers with no credit histories still have options to secure a home loan.
1. Consider getting a government-insured loan.
The Federal Housing Administration (FHA) backs all the FHA loans that come with flexible credit requirements. Borrowers need to have a minimum credit score of 500 within this mortgage program.
Lenders can either request a non-traditional merged credit report in place of the traditional credit report from a credit reporting company, or they can develop a credit history using the alternative tradelines.
- Utility bill payment records
- Home rental and car insurance payments
- Payment to childcare providers
- Savings deposits for the last 12 months
- A car lease
- A personal loan with repayment terms and conditions in writing
Perk – You may qualify for a mortgage with a down payment that is as low as 3.5%.
Loss – Your monthly payments will increase since all FHA loans come with mortgage insurance premiums.
2. Go through the process of manual underwriting.
Manual underwriting happens when a mortgage application is personally reviewed by an underwriter instead of an AI (artificial intelligence) system. When you apply for a conventional loan, the underwriter examines that you:
- Have funds to make the down payment
- Earn enough to make mortgage payments
- Have an acceptable debt-to-income (DTI) ratio
- Have cash reserves in your account
You are required to submit the following documents to show a record of timely payments you’ve made in the past.
- Utility and phone payments
- Rent payments for the previous two years
- Payments towards other recurring expenses
Perk – Manual underwriting can increase your chances of getting a mortgage.
Loss – Some lenders will not manually underwrite a mortgage because it is time-consuming and expensive. Lenders agreeing to do this may charge a higher interest rate.
3. Apply with a co-borrower.
One of the best options to obtain a mortgage when you have no credit is to apply with a co-borrower who has a strong credit history. Your co-borrower can be your spouse, family member, or friend.
The lender includes the person in the loan who is held equally liable to make mortgage payments on time. You both get included in the property title.
Perk – If your co-borrower has strong credit, it can help you to obtain a mortgage faster.
Loss – You may have to take out a smaller mortgage than you would have with two borrower incomes to qualify for a home loan.
How to build credit
Your first task should be to build your credit over time and then apply for a home loan. It is much easier to get a mortgage when you have a good credit score. This is how you can build your credit.
1. Get yourself a secured credit card.
A secured credit card is similar to an unsecured credit card. The only difference is that you need to provide a security deposit upfront. Focus on making all your payments on time and keeping the balance low so that you can build a positive credit history.
2. Become an authorized user.
The primary account holder (could be your family or friend) simply adds your name to their credit card account, authorizing you to use it. You don’t get the same privileges that the primary account holder gets, but their good credit history helps you build yours.
3. Take out a credit builder loan.
A few creditors offer small loans to help you build your credit, however, instead of giving the money upfront, they put it into a savings account. You get to build your credit over several months or a few years while you make payments on time. By the end of the loan term, you receive your funds.
To read more about credit builder loans, click here.
4. Look for a creditworthy co-signer.
Your extended family members, such as your aunts, uncles, and cousins can all be your valid co-signers. Make sure that they have good credit and a strong financial profile, however. You can qualify for a mortgage and get a low-interest rate when your co-signer agrees to make payments when you can’t.
Now that you know the process to buy a house without credit, you can move forward by following the helpful information shared above.
For additional help with credit restoration or credit repair, visit www.coolcredit.com to book a free consultation.