Tales of looming credit card debt and crushing student loan debt have inspired a good number of young adults to decide against borrowing loans and opening credit cards. For many, this feels like a financially wise choice, up to the moment that they are ready to buy their first home.
Mortgage lenders rely heavily on your credit score to determine the terms of your loan. For those who have never had a credit card, having no credit score can suddenly become a barrier to financial security. But can you buy a house with no credit? In some cases, consumers without credit can buy a house. Here’s how to do it.
Credit Requirements to Buy a House
The credit score is one of the key measures that mortgage lenders use to judge the creditworthiness of applicants for loans. For conventional loans, the average lowest acceptable credit score is 620. You can often qualify for FHA, USDA, and other federally-backed loans with a credit score as low as 500.
However, these are merely general standards rather than hard rules. Depending on their policies, some lenders are still willing to look at the whole picture and make exceptions for individuals. Having a credit score is not always a requirement for getting a mortgage loan. If you can otherwise prove that you are a trustworthy borrower, a lender may still be willing to work with you.
How to Buy a House With No Credit
If you have no credit, you can still get a mortgage. However, you may have to look a little harder than even an individual with a bad credit score to find a lender who will work with you.
The most obvious solution to not having credit may be starting to build a credit history. This is a wise long-term goal, but it takes years to build a solid credit history, and you may have a more immediate need for housing. The following are a few tips for how to get a loan without credit.
Seller Financing
Some sellers will allow you to make installments on the home instead of having to take out a mortgage. Not everyone will do this, but it is a good option for those with no credit. However, don’t be surprised to need a large down payment.
Private Loans
Another very simple way of buying a house with no credit is to seek out personal loans from private individuals who will let you get a loan with no credit check. This route is not possible for everyone and comes with unique risks. It also may require that you put up some collateral.
Documentation of Income and Payment History
The chief concern of a mortgage lender is your likelihood to pay your mortgage each month. A good credit score is the easiest, most widely respected way to make this judgment call, but there are other ways. Since you cannot supply them with the proof they prefer, lenders view applicants with no credit as a bigger risk.
You can provide documents like your pay stubs, tax returns, and monthly statements for utility bills to verify both your income and your record of payment history. The mortgage lender can use this information to calculate your debt-to-income ratio. Debt-to-income or DTI is a percentage that shows how much of your income it takes to cover your monthly bills and debts. If your DTI is well within the lender’s standards, they may be happy to offer you a mortgage, even if you have no credit.
In addition to your income, the mortgage lender needs ample evidence that you’ll still be able to pay if there is some disruption in your usual source of income. The lender will likely require you to have a substantial amount of money in a savings account or some easily liquefiable asset or investment.
Being prepared to make a substantial down payment on the mortgage, ideally 20% or more, can also make a lender more inclined to work with you if you have no credit. This gives you more equity in the home and makes lending to you less of a risk for the lender.
Manual Underwriting
Although you can get a mortgage from a traditional lender with no credit, you’ll likely still need to go through the process of manual underwriting. The difference is that with no credit, a human will look at your application and documentation. Normally, this is a more automated process. The lender usually plugs in your information, and a computer accepts or rejects your application. Manual underwriting typically takes more time and documentation, but it can be worth it for those without credit.
FHA Loans
FHA loans are well known for accepting people with no credit score or very limited credit history. FHA loans are a type of federally-backed mortgage, but you get the loan from many of the same lenders that offer conventional mortgage loans. You’ll need to find a lender that both processes FHA loans and is willing to accept customers who do not have an extensive credit history.
No Score Mortgages
Although they are not as common, there are also mortgage lenders that specialize in working with people who do not have a credit score. Running an internet search for no-score mortgages in your region can provide you with many opportunities. Often, you’ll find one or several lenders who do not see your lack of credit history as a hurdle.
Difference Between Low Credit and No Credit
When it comes to mortgage lenders or any other company that lends money to the public, your credit score is an objective measure of your reputation with money. If you have no credit score, the lender lacks an easy way of measuring how you handle money. Yet, having no credit score is far better than having a low or bad credit score.
Just as the average person would take a hard pass on having a convicted burglar house sit, the average bank doesn’t want to lend to someone with bad credit. You’d also probably be very skeptical about having a complete stranger house sit, but it’s a better option than the first.
If you have no credit score, you’re in the same boat as the complete stranger. The good news is that you can take a few easy steps to earn trust with documentation of your financial history. You can prove you have adequate income, good payment history, low monthly debts, and enough savings to pay your mortgage even if you face financial hardship.
