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Buying a House with No Credit?

by | Jan 1, 2020

Having credit is a vital part of buying a home. It lets lenders know how you manage your debt and if you’re responsible enough to make the payments every month.

What Does “No Credit” Mean?

Not having credit means that you don’t have a credit history. This means that you’ve never applied for a credit card and always pay in full. It’s a great way to live by because you’ll never have debt and it’s the most responsible way to manage money. However, by doing this you’re also limiting yourself from building a credit history, which will benefit you in the future.
There may be a time in the future where you will need some kind of credit history like getting a new apartment, buying a car, or even buying a home. Technically, you can buy a car and home without credit, but that would require paying for it in cash and in full. Most people don’t have that kind of money lying around. Having a low credit score is something that can be worked with, but having no credit whatsoever is a different story.

Is it Possible to Get a Credit Report Without a Credit Card?

Yes, it is possible to get a credit report without having to sign up for a credit card. There are other ways to build your credit such as paying your bills on time, so it is possible to build an “alternative credit history” from your past rent checks, utility bills, insurance premiums, medical bills, cell phone bills, etc.

Unfortunately, gathering all of the information to build this can take several months to do and not all lenders can do it. Even if getting an alternative credit report is possible, the buyer will likely will get a higher rate than someone who has a good traditional credit history.

How to buy a house with no credit

Get a credit card

The best option in this scenario is to get a credit card, use it to buy something, and pay the minimum amount for at least 6 months. It takes at least 6 months to get a FICO score from credit bureaus (the big 3 being Experian, Equifax, and TransUnion). You can use it to purchase something moderately expensive, or you can make a small purchase once a month and pay it off in full. You’ll be building real credit and since great money managing skills were already in practice, your credit will look great.

Get an FHA loan

If you’re looking to purchase a home, the FHA Loan is the best choice if you have no credit.  While a conventional mortgage is the most common type of mortgage, an FHA (Federal Housing Administration) home loan is backed by the government and allows lenders to use nontraditional and alternative credit. Buyers must be able to prove that they haven’t been late on their rent, utility bills, car insurance, or medical bills for at least one year, but it doesn’t require as strict credit score and debt-to-income ratio requirements.  With an FHA loan, you can qualify with no credit history, as the FHA looks at payment history such as utility payments, cell phone payments, rental and car insurance payments.  On another note, an FHA-backed mortgage requires the borrower to pay a monthly insurance premium that is different than private mortgage insurance that comes with conventional loans.  In this insurance, the only way to remove it is to refinance the loan.  FHA mortgages are also very popular because they have a lower down payment minimum, typically around 3.5%.

Utilize a credit union

If you can show a history of on-time payments, credit unions or smaller banks will typically be more willing to work with a borrower with no credit history.

Get a cosigner

A cosigner is where someone else takes legal responsibility for your loan if you default on the loan.  This is typically a parent or significant other.  A cosigner can also help a borrower get a better interest rate or higher loan amount.

Use alternative programs

There are other programs out there that can help low- income borrowers find their way to homeownership, but it is important to note that many of these programs are available for first-time homebuyers.

Habitat for Humanity

This is housing for people with low income and the ability to only have a small loan with a monthly payment as low as $300. To qualify, you need to prove a need for housing, show the ability to have enough money to cover closing costs, monthly mortgage payments and a down payment, and each applicant has to finish at least 400 hours of volunteer work. While bankruptcy doesn’t automatically disqualify borrowers, they must show a good credit history since the bankruptcy and it needs to have been at least three years before the application.

NACA

This is a homebuying program that is for borrowers with low incomes with no credit or bad credit.  NACA or Neighborhood Assistance Corporation of America does not require a down payment or charge closing costs and interest rates are typically below standard mortgage rates.

VA Loan

This is a loan for a former or current military member and has a no credit score requirement.  VA loans have no minimum down payment and interest rates below standard mortgage rates.

Find the right mortgage broker

It is important to be up-front with mortgage lenders to let them know that you have no credit history so you can better understand all of your options.  Finding the right mortgage broker for your situation is very important as they may have the right options for you, as well as could provide more information on way to increase your credit to get a mortgage loan.

Bottom Line

While it is possible to find loan programs that will allow you to get into a mortgage with no credit, building credit is a great first step in the home buying process.  Most mortgage has minimum credit score requirements, so coming up a with a plan to increase your credit score can greatly increase your mortgage options.

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