2. Find the right loan and the right lender
Take a look at all of your mortgage options, which we’ll cover below. Many of the government guaranteed loans cater to borrowers with limited credit as they allow lenders to manually take out loans.
If you want to get a conventional mortgage, you will also need a lender who will manually guarantee your loan. Small lenders and credit unions are much more likely to use manual underwriting than large corporate lenders. The only way to know for sure is to call lenders and find out about their underwriting process.
3. Establish an alternative payment history
As we mentioned above, if you don’t have a credit history, you’ll need another way to show that you’ll be paying off your mortgage. This not only means paying all of your bills on time, but also documenting your alternative payment history.
Whatever loan you apply for, you will likely need to show your loan officer daily payments going back several years, such as your rent, utility bills, and car payments. Make sure you pay all bills on time and in full. Keep receipts in a file that you can easily access.
4. Save a down payment
When it comes to buying a home without credit, you may need to compensate by making a larger down payment. Squirrel away from any extra cash you can. Find out how much you can afford to save each month and consider setting up an automatic transfer to your savings account. The more money you have for a down payment, the more favorably lenders will view your loan application.
5. Consider a co-signer
One way to compensate for your thin credit history might be to have a friend or family member with high credit co-sign with you. Lenders will take that person’s credit rating into account in their decision. Remember, if you ever miss a mortgage payment, your mortgage co-signer is responsible for it. The loan will also show up as a debt on their credit report. Don’t ask anyone to co-sign a loan unless you are confident that you will never miss a payment. And be ready to refinance your mortgage once you qualify for a full loan.
No credit mortgage options
If your credit history is poor or nonexistent, several mortgage options are available.
As we have seen, you can take out a conventional mortgage without credit, but it can take a long time. You will need to find a lender willing to consider another payment history. Start with smaller mortgage lenders as they can be more forgiving and the service is likely to be personalized.
You’ll need to show that you have a history of on-time payments, so you need to back up your claim with receipts for things like paying for your car and rent. Be prepared to provide proof of income, and possibly education as well. You’ll likely need a high debt-to-income ratio (DTI) and a solid down payment. The key to how to buy a home without credit is to take every opportunity to show the lender that you are a reliable applicant.
In a word: It can be difficult 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 are the best and the worst mortgage loan. In their favor, FHA loans are guaranteed by the government and easier to obtain than a conventional loan. As long as you have at least 3.5% down payment, there is a good chance that you will be eligible for an FHA loan. And, the FHA has a procedure for applicants without credit. As with other loans, you will need an FHA lender who is willing to guarantee your loan manually, so you will need your proof of daily payments.
Before you get too excited, however, FHA mortgages are more expensive than conventional loans. Not only will an FHA loan charge a higher interest rate than a conventional mortgage loan, but FHA loans are drowning in fees. You could be paying thousands of dollars more over the life of a mortgage just because you took out an FHA loan.
In a word: 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 have had time to build a solid credit history.
If you are 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 supported by the ‘Veterans Administration. (VIRGINIA). A loan secured by the VA does not require a specific credit score, so it is up to individual lenders to decide whether or not to approve you. Lenders can use an alternative payment history to approve VA loans. Unlike FHA loans, there is no down payment requirement and you may not have to pay a higher interest rate.
In a word: If you have access to a VA loan, compare it to a conventional lender to see which one will cost the least over the life of the loan.
It is possible to qualify for a USDA loan with no credit rating, but, like 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 business line”. Typically, he asks to see 12 months proof that you paid other bills on time. Having several months of housing payments in your bank account can also encourage USDA lenders to approve your loan.
In a word: USDA mortgages – designed for low-income buyers in rural areas – may be a good option for those new to the housing market.
How to Build Your Credit Score for a Mortgage
Mortgage rates are expected to stay relatively low for the foreseeable future, so if you’re not ready to buy today, use this time to build up your credit. If you want to build a credit score to qualify for a mortgage (or any other type of loan), here are some ways to do it:
- Become an authorized user on someone else’s credit card. Once your name is added, you get credit every time the card is paid on time.
- Take a credit card with a co-signer. As mentioned above, getting someone to co-sign is serious business, but if you are responsible and make all payments on time, a credit card can quickly help you establish credit. Do yourself the favor of paying off the card in full each month. Not only will you establish credit, but you will accomplish it without going into debt at high interest rates. And every payment you make adds to your credit history.
- Open a secure credit card. Like “regular” credit cards, most secured credit cards report your payments to the credit bureaus, which helps you build your credit score. To open a secure card, you will need to make a deposit. The amount you are allowed to charge is equal to the amount deposited. Look for a secure card with low fees and make sure the card issuer reports to the credit bureaus.
We have now covered all the steps to buying a home without credit. It might not be easy, but we all have to start somewhere. Pick the type of mortgage that’s right for you and you’re on your way. Still have questions? For detailed information on buying a home, see our buyer’s checklist.