Can you buy a house without credit?
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Credit is one of the main elements of qualifying for a mortgage – and while some buyers have built up long credit histories, others are just getting started. First-time home buyers are less likely to have credit, which means they might have difficulty getting a loan.
If you are in this situation, don’t worry, it is still possible to buy a house without credit. You will just need to show that you can afford the upfront fees and the monthly mortgage payments.
Here’s how to get a mortgage without a credit history:
What is credit?
Credit is the ability to borrow money when you need it. If you’ve heard people talk about construction credit, that means taking action to show that you typically pay back the money you borrow as agreed.
There are three main things to your credit, and understanding how they fit together can help you qualify for a mortgage.
Your credit history is a record of any loans or credit cards you have taken out in the past. Mortgage lenders look at your credit history to see what types of credit you have taken on and how you have handled that debt.
They use this information to predict whether you will pay off your mortgage in the future.
Your credit history details are recorded in your credit reports. These documents may include:
- Each credit account you have signed up, including the type of account
- A history of each payment you made and if they were on time
- The declared account balance
- Public documents, such as foreclosures and bankruptcies
You can access your credit reports on AnnualCreditReport.com or through the three major credit bureaus: Experian, TransUnion, and Equifax. These companies collect information about your accounts and add the details to your credit reports.
Credit rating companies regularly analyze your credit reports and use the information to calculate your credit scores. Major credit scores, such as FICO, range from 300 to 850. Generally, a higher score can help you buy a home with a good interest rate.
There is a different minimum credit score requirement for each mortgage program. Here’s a quick rundown:
|Type of loan||Min. credit rating|
Learn more: 5 types of mortgages: which one is right for you?
No Credit Vs Bad Credit: What’s the Difference?
If you don’t have credit, it means your credit reports don’t contain enough recent information to calculate a credit score. This is called having a “thin credit file” or being “invisible credit”.
This can happen if:
- You’ve never applied for a loan or credit card
- You have borrowed money but your creditors are not reporting your account information to the credit bureaus
- You repaid your loans more than two years ago and haven’t opened a new account
With a thin credit history, creditors don’t have a good way of predicting the likelihood of you paying off your debt. The federal government estimates that one in ten adults does not have a credit history with the three major credit bureaus.
Typically, a person with a credit score of 640 or less is considered to have bad or bad credit. Here’s what the standard credit score ranges look like:
Major negative events, such as foreclosures and bankruptcies, can also significantly damage your credit. Lenders may see a low credit score as a warning sign that you may be missing your mortgage payments at some point.
How to get a mortgage without credit
Potential buyers without an extensive credit history still have options for obtaining a home loan.
Shopping for a mortgage can be stressful. Fortunately, Credible simplifies this process and makes it easier to compare multiple lenders.
You can view the prequalified rates of our partner lenders and generate a simplified pre-approval letter in just a few minutes.
Consider a government insured loan
A government insured mortgage is a home loan guaranteed by the federal government. FHA loans are guaranteed by the Federal Housing Administration and come with flexible credit requirements.
This mortgage program generally requires borrowers to have a credit score of at least 500. But instead of using a traditional credit report, lenders can request a “non-traditional merged credit report” from a reporting company. credit.
Or the lender can develop a credit history using alternative business lines, such as:
- Utility payment records, including cell phone bills
- House rental payments
- Auto insurance payments
- Payments to child care providers
- Rental services with option to purchase
- 12 months of savings deposits
- Car rental
- A personal loan with written repayment terms
Go through manual subscription
When a mortgage application goes through manual underwriting, an underwriter personally reviews the application instead of an automated system. If you are applying for a classic loan, the underwriter checks that you:
- Have the funds to make a down payment
- Earn enough income to cover mortgage payments
- Have an acceptable debt-to-income ratio (DTI)
- Have cash reserves in your bank account
Instead of a traditional credit history, be prepared to hand over these documents to show your payment history on time:
- The rents for the two previous years
- Utility and cell phone payments
- Payments for other recurring expenses
Apply with a co-borrower
Another option is to apply to a co-borrower who has a strong credit history. The co-borrower can be a spouse, relative, or friend, and they don’t have to live in the house.
The lender would include that person in the loan and base the mortgage qualification on their income and credit rating. You and the co-borrower are also responsible for the mortgage payments, and you will both be included on the title to the property.
How to build credit
While it is possible to get a home loan without credit, the process is easier when you have a good credit rating.
If you decide to postpone the purchase for a few months, work on building up credit to improve your chances of being eligible for a home loan. Here are a few ways to do it:
- Become an authorized user. When a trusted friend or relative adds you to one of their credit card accounts, the credit card issuer reports the account as part of your credit history. You will not be responsible for paying any fees and you benefit from their credit history.
- Take out a secure credit card. A secured credit card works the same as an unsecured credit card, except that you provide a security deposit in advance. Making payments on time and keeping your balance low can help you build a positive credit history. This might be a good option if you can’t find someone who will add you as an authorized user.
- Apply for a manufacturer credit. Some credit unions offer small loans specifically to help people build credit. Instead of getting the money up front, the financial institution puts it in a savings account. You will accumulate credit over several months or years by making your payments on time. At the end of the loan term, you will receive the funds.
- Find a creditworthy co-signer. When you get a co-signer, that person agrees to make your mortgage payments for you if you can’t. This could help you qualify for the mortgage and get a lower interest rate. However, the co-signer should understand the risks involved before signing up. They will also be responsible for repaying any debt.
Keep reading: 10 mistakes to avoid as a first-time home buyer