2. Find the right loan and lender
Investigate all your mortgage options, which we’ll cover below. Several of the government-backed loans cater to borrowers with limited credit as they allow lenders to manually underwrite loans.
If you want to land a conventional mortgage, you’ll also need a lender that will manually underwrite your loan. Small lenders and credit unions are far more likely to employ manual underwriting than large, corporate lenders. The only way to know for sure is to call lenders and ask about their underwriting process.
3. Establish an alternative payment history
As we discussed above, if you don’t have a credit history, you’ll need another way to show you’ll repay your mortgage. That means not only paying all your bills on time, but also documenting your alternative payment history.
Whatever loan you apply for, you’ll likely need to show your loan officer everyday payments going back several years, such as your rent, utility bills, and car payments. Make sure to pay all bills on time and in full. Keep receipts in a file you can easily access.
4. Save up a down payment
When it comes to how to buy a house with no credit, you might need to compensate by making a larger down payment. Squirrel away any extra money you can. Work out how much you can afford to save each month and consider setting up an automatic transfer into your savings account. The more money you have for a down payment, the more favorably lenders will view your loan application.
5. Consider a cosigner
One way to make up for your thin credit file could be to ask a friend or family member with strong credit to cosign with you. Lenders will factor that person’s credit score into their decision. Remember, if you ever miss a mortgage payment, your mortgage cosigner is on the hook for it. The loan will also show as a debt on their credit report. Do not ask anyone to cosign a loan unless you are convinced that you will never miss a payment. And be prepared to refinance your mortgage once you can qualify for a loan in your own right.
Mortgage options for no credit
If your credit report is thin to non-existent, there are several mortgage options available.
As we’ve seen, you can snag a conventional mortgage with no credit, but it might be a long shot. You’ll need to find a lender willing to consider an alternative payment history. Start with smaller mortgage lenders as they may be more lenient, and the service is likely to be personalized.
You’ll need to show you have a history of on-time payments, so you should support your application with receipts for things like your car payment and rent. Be prepared to provide proof of income, and possibly also education. You’ll likely need a high debt-to-income ratio (DTI) and solid down payment. The key to how to buy a house with no credit is take every opportunity to show the lender you are a reliable applicant.
In a nutshell: It may be challenging 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 represent the best and worst of mortgage loans. In their favor, FHA loans are government-backed and easier to qualify for than a conventional loan. As long as you have at least 3.5% down, there’s a good chance you will be eligible for an FHA loan. And, the FHA has a procedure for applicants with no credit. As with other loans, you’ll need an FHA lender that is willing to underwrite your loan manually, so you’ll need your proof of everyday payments.
Before you get too excited, though, FHA mortgages are more expensive than conventional loans. Not only will an FHA loan charge a higher interest rate than a conventional mortgage, but FHA loans are drowning in fees. You could pay thousands more over the life of a mortgage, simply because you took out an FHA loan.
In a nutshell: 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’ve had time to build a strong credit history.
If you’re 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 backed by the Veterans Administration (VA). A VA-backed loan requires no specific credit score, so it’s up to individual lenders to decide whether to approve you. Lenders can use an alternative payment history to approve VA loans. Unlike FHA loans, there are no down payment requirements and you may not have to pay a higher interest rate.
In a nutshell: If you have access to a VA loan, compare it against a conventional lender to learn which one will cost less over the life of the loan.
It is possible to qualify for a USDA loan without a credit score, but, as with the 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 tradeline.” Typically, it asks to see 12 months’ worth of proof that you’ve paid other bills on time. Having several months’ worth of housing payments in your bank account may also inspire USDA lenders to approve your loan.
In a nutshell: USDA mortgages — designed for lower-income buyers in rural areas — can be a good option for those just breaking into 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 that some time to build your credit. If you’d like to build a credit score to qualify for a mortgage loan (or any other loan type), here are some ways to make it happen:
- Become an authorized user on someone else’s credit card. Once your name is added, you get credit each time the card is paid on time.
- Take out a credit card with a cosigner. As mentioned above, it is serious business to ask someone to cosign, but if you’re responsible and make all payments on time, a credit card can quickly help you establish credit. Do yourself the favor of paying the card off in full each month. Not only will you establish credit, but you will accomplish it without going into high-interest debt. And each payment you make adds to your credit history.
- Open a secured credit card. Like “regular” credit cards, most secured credit cards report your payments to the credit bureaus, helping to build your credit score. To open a secured card, you’ll need to make a deposit. The amount you’re allowed to charge is equal to the amount deposited. Look for a secured card with low fees, and make sure the card issuer reports to the credit bureaus.
Now we’ve covered all the steps in how to buy a house with no credit. It may not be easy, but we all have to start somewhere. Choose the mortgage type that works best for you, and you’re on your way. Still have questions? For in-depth information on buying a home, check out our Home Buyer Checklist.
View more information: https://www.fool.com/the-ascent/mortgages/how-to-buy-house-no-credit/