If you’re young and inexperienced with borrowing money, or if you’ve simply made a point to avoid debt as much as possible, you might face a few challenges from not having enough credit history for a mortgage approval.
While it’s important to understand how lack of credit affects your options, it’s not impossible to be a first-time homebuyer with no credit. Here’s what you need to know about how to get a loan with no credit, including:
- Can You Buy a House With No Credit?
- How To Buy a House With No Credit
- Mortgage Options for Borrowers With No Credit
- How To Build Credit
- FAQ: How To Buy a House With No Credit
- The Bottom Line on Buying a Home With No Credit
Can You Buy a House With No Credit?
Living debt-free can be commendable as a goal, but it has downsides. In general, you need credit to buy a house. While you can do so without a credit history, it might not be easy or straightforward. Learn more about how your credit history — or lack thereof — impacts the homebuying process.
What is credit?
Credit is the means to buy now and pay later. Before lenders extend a loan or line of credit, they need to be confident that the borrower will repay the money according to the agreed-upon terms.
Creditworthiness is determined by the borrower’s financial details and behaviors, which are compiled into credit reports. Credit scoring models then use this information to calculate a credit score — a three-digit number that tells lenders how reliable or risky you are with credit accounts.
Though the exact algorithms used to create credit scores vary from company to company, some general factors are well known. For example, FICO credit scores, which are used by most lenders, consider the following factors:
- Payment history (35%).
- Amounts owed (30%).
- Length of credit history (15%).
- New credit (10%).
- Credit mix (10%).
Buying a home with no credit vs. bad credit vs. good credit
When it comes to buying a home, lenders take your credit seriously. They require a credit score of at least 620 for conventional loans, which are mortgages that don’t belong to any government program. Additionally, the lowest interest rates and fees are typically offered to borrowers with credit scores of 760 and higher.
If you’re wondering how to buy a house with bad credit — with “bad credit” defined as a FICO credit score lower than 580 — you could have trouble getting approved at all. Bad-credit home loans also tend to come with much higher interest rates. However, buying a home with bad credit is not the same as buying with no credit.
Bad credit means you mishandled debt in the past. It’s a red flag to lenders that shows you’re a risky borrower because you’ve failed to uphold your end of the bargain.
With no credit, it’s tough to predict how you’ll handle borrowing money because there’s no past behavior to evaluate. This is also known as having a “thin credit file.”
“Credit history is important because it shows the historical trend of a borrower paying or not paying their debts,” says Khari Washington, a broker and founder of 1st United Realty & Mortgage in Riverside, California. “Credit history also shows if someone is utilizing a lot of the revolving credit they have available and if they are likely living beyond their means.”
Even though having a thin credit file isn’t the same as having bad credit, it still means mortgage companies can’t lend money to you with confidence, since they don’t have an easy way of determining your creditworthiness.
How To Buy a House With No Credit
If you want to buy a home with no credit, there are a few tips you can use to improve your odds of getting approved for a mortgage.
Get a co-signer
A co-signer is someone who meets the loan requirements and agrees to pay back your lender if you don’t. Your co-signer’s credit will be negatively affected if you make late mortgage payments or miss any, so it’s important that they’re comfortable with the risks involved.
Increase your down payment
If a lack of credit is holding you back from being approved for a mortgage, some lenders may agree to work with you in exchange for a larger down payment. Putting more money down reduces your risk as a borrower. It lowers the total amount you need to borrow and allows you to start off with more equity in the property, which helps protect you from owing more than it’s worth if home values decline.
In general, you should aim for 20% down, but you may need an even bigger down payment if you have no credit.
Consider manual underwriting
Underwriting is the lender’s process of evaluating your documentation and determining what you qualify for. Many lenders automate a good portion of this — but if you have a thin credit file, lenders can’t rely on the usual data points. However, they may agree to perform manual underwriting. This involves having a loan officer personally review your information and examine your payment history in areas unrelated to debt, such as rent payments and utility payments.
Try a smaller lender
If your first attempt at getting a no-credit mortgage with a major lender is denied, you might have better luck with a community bank or credit union. These financial institutions can work with individual clients and members to help them secure financing. Also, credit unions are not-for-profit companies, meaning they are less concerned about generating revenue and may be willing to take on riskier loans.
Ask for seller financing
Although it’s unusual, you may be able to find a seller who wants to finance the sale themselves, extending a loan to you directly.
“Only a small portion of homes are financed by the seller,” Washington says. “If you can find it, many sellers will finance with poor or no credit.”
However, some potential trade-offs include bigger down payment requirements, inflated mortgage rates, and fewer protections under the law.
Mortgage Options for Borrowers With No Credit
Lenders consider a few important factors when evaluating a potential borrower. The down payment is a big one; if you put down too little, you may be required to pay private mortgage insurance, or PMI, to offset some of the risk for the lender. Most lenders also prefer you meet a certain credit score minimum. And your debt-to-income ratio, or DTI — which shows how much of your gross monthly income goes toward repaying debt — often needs to be under a certain threshold.
There are several mortgage options with different eligibility requirements. Below is a breakdown of the different types of mortgage loans — and how you can get one with no credit.
Borrowing Requirements by Loan Type
|Loan Type||Minimum Down Payment||Minimum Credit Score||Maximum DTI|
|FHA||3.5% with credit score of 580 and above, or 10% with credit score between 500 and 579||500||43% or higher if additional requirements are met|
|Conventional (Conforming)||3%, or 20% to avoid PMI||620||36% (or higher if additional requirements are met) for manually underwritten loans; 50% for automatically underwritten loans|
|VA||0%||Varies by lender||41% or higher if additional requirements are met|
|USDA||0%||Typically 640||41% or higher if additional requirements are met|
Backed by the Federal Housing Administration, FHA loans have some of the most lenient requirements, making them a viable option for many first-time homebuyers and borrowers with no credit. You would apply through a private lender that offers FHA-insured loans. If you have a nontraditional credit history, these lenders can evaluate your ability to repay debt in alternative ways.
Conventional mortgages are the most common type of home loan, and they aren’t backed by any government agency. There are two types of conventional mortgages — conforming and nonconforming — but the former is more relevant for borrowers with no credit. A conforming loan means the mortgage adheres to the standards set by the government, Fannie Mae, and Freddie Mac. Lenders that offer conventional loans are required to create a nontraditional credit profile for borrowers with insufficient credit.
Backed by the Department of Veterans Affairs, VA loans allow members of the military, veterans, and their surviving spouses to buy a home with no money down. However, you’ll pay a one-time VA funding fee to help fund the program. There’s no credit score requirement, which means it’s up to lenders whether to approve you. Visit the eBenefits website to start the process of applying for a VA loan.
These loans are backed by the Department of Agriculture and available to low- and moderate-income borrowers in rural areas. USDA loans don’t require a down payment, and lenders can perform manual underwriting for borrowers with no credit. If you’re interested in applying for this type of loan, you can browse active lenders here.
How To Build Credit
If you want to build your credit from scratch, there are a few steps you can take to do so:
- Pay bills on time. One of the best ways to build a good credit score is to make all payments in full and on time. This is because payment history is the most heavily weighted factor in your credit score. You can set up autopay so that you don’t forget any due dates — but make sure you have enough in your checking account to avoid overdraft fees.
- Reduce your existing debt. Since your total debt accounts for a good chunk of your credit score, paying down existing debt is a quick way to boost your score. “To obtain a better score quickly, get your revolving credit card and loan balances below 30% of the credit limit,” Washington says.
- Consider getting a secured credit card. These cards require you to pay a security deposit upfront, making them less risky for lenders and improving your approval odds. Charging expenses to a secured credit card and then paying off the balance each month will help you develop a positive credit history. In the future, you can upgrade to a traditional credit card and get your deposit back.
- Be an authorized user on someone else’s account. Instead of opening your own line of credit, consider asking someone you trust if they can add your name to one of their credit cards. You don’t need to use the card at all — as the primary cardholder continues to wield credit responsibly, their habits will help establish a positive credit history for you, too. However, if they miss any payments, your credit will suffer as well — so tread carefully.
- Request a rapid rescore. If you’ve recently improved your credit, Washington suggests getting your lender to perform a rapid rescore instead of waiting for the changes to show up on your credit report. “A lender can go through your credit and submit paperwork to the credit bureaus on your behalf, fixing any incorrect or outdated information on your credit report,” he says. Once your new credit score is ready, your mortgage application can include the higher score.
Why you shouldn’t try to build credit at the last minute
A good credit score doesn’t happen overnight. Usually, it takes three to six months to establish a credit history at all — and many more to build excellent credit.
Additionally, every time you apply for credit, the lender will review your credit report, which is recorded on your file as a “hard inquiry.” Hard inquiries cause your credit score to temporarily drop by several points, so it’s counterproductive to try to build credit quickly by opening different credit cards right before applying for a mortgage.
Keep in mind that if anyone offers you an instant good credit score or a guaranteed credit repair for an upfront fee, it’s almost certainly a scam. Building credit may not be fast or particularly easy, but it’s something that you can do on your own for free.
FAQ: How To Buy a House With No Credit
Still have questions about buying a house with no credit? We answered some of the most common queries below.
Qualifying for a mortgage is possible with no credit history, but the exact requirements to get approved vary from lender to lender. Ultimately, you need to compare quotes from different mortgage lenders and understand each lender’s underwriting requirements and process.
Making a larger down payment than the minimum requirement can help increase your chances of getting approved. So, borrowers with no credit score can try putting down more than 20% of the loan amount. If that’s not affordable, keep in mind there are mortgages — such as VA loans — that allow you to put zero percent down even with no credit score. You should evaluate your borrowing options and see what type of loan fits your situation best.
A co-borrower isn’t the same thing as a co-signer. While both are financially responsible if a borrower can’t make their payments, a co-borrower makes regular payments and also legally owns the home. For example, a mortgage has co-borrowers when a married couple finances a home purchase together. A co-signer, on the other hand, is not considered one of the homeowners or borrowers. Instead, they agree to take over a loan only if the primary borrower defaults.
The Bottom Line on Buying a Home With No Credit
Though it’s possible, buying a house when you don’t have a credit history can be complicated. Be prepared to shop around, submit additional documentation to get approved for a home loan, and potentially pay more. A home is likely the most expensive purchase you’ll ever make, so it’s smart to strive for a good credit score before applying for a mortgage. That way you’ll be getting the best deal possible on an investment that may last for a very long time.