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Can You Get a Mortgage With No Credit Score?

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Applying for a new home loan can be an intimidating process, especially if you have a less-than-ideal credit score. If you’re trying to buy a home without a credit score at all, though, you may find the process to be even more challenging.

While there are certain loan programs and lenders with minimum credit score requirements, there are ways for how to get out a mortgage with no credit score. Here’s a look at what to expect from the process and the options you’ll have.

How to get a mortgage with no credit score

There are a few specific things you can do if you’re looking to get a mortgage with no credit score. Here are some ideas of where to start.

Get a cosigner

Whether you have poor credit or no credit score at all, adding a creditworthy cosigner to your mortgage loan can be one way to improve your approval odds.

A cosigner is someone who agrees to share responsibility for your loan and its timely repayment — even if you’re the one technically making payments each month. Your cosigner may be a spouse, parent, sibling or even a close friend who is willing to be added to your mortgage. It’s important to note that your loan and its repayment history will be reported to their credit, too.

Have a large down payment

The larger the down payment you offer to make on a home, the less risk the lender has to take on by offering you a mortgage loan. If you were to default on your loan repayment, the lender has a better chance of recouping their money if you’ve already contributed a significant portion and/or there’s notable equity established in the home.

If you are struggling to qualify for a new home mortgage with your existing credit history, offering a large down payment may help improve your odds. Additionally, some lenders and mortgage loan products may require a larger down payment if your credit score is lower.

Go through a manual underwriting process

During the loan underwriting process, a lender analyzes a borrower’s level of risk in regards to repayment of their new loan. This means looking at factors such as income, employment status, existing debt and other expenses to see if the borrower can reasonably make their monthly payments without struggling.

THINGS YOU SHOULD KNOW 

Many lenders today use automated underwriting systems, which utilize computer programs to initially vet mortgage loan applicants. However, these systems are designed to find red flags, such as a low or nonexistent credit score, and may trigger a denial of the loan application. By requesting a manual underwriting process — meaning that a human underwriter goes through the application themselves — you may be able to avoid an automatic denial. These underwriters can use their own judgement in reviewing your application, considering all factors provided.

Use credit unions or online lenders

If you have an existing relationship with a credit union or local bank, you may have a better chance of mortgage loan approval there. That’s because credit unions often have more flexible lending requirements and a more personalized approach. If you have other products through that institution — such as an auto loan or credit card — and have a healthy payment history on those accounts — the institution is likely to take this creditworthiness into account.

Additionally, you could have better luck applying with online lenders, such as through an aggregator platform. This allows you to shop around from multiple lenders at once, making it easier to find one with more flexible loan requirements.

Loan programs that allow for mortgage approval with no credit score

In addition to the loan application methods mentioned above, there are also specific mortgage loan programs that cater to low and even no credit score applicants. Some of these are government programs, which insure the loan for the lender and make it easier for them to approve borrowers with added risk factors (such as a limited credit history).

There are four primary types of mortgage loans, each with their own minimum credit score requirements.

Conventional: Conventional mortgage lenders can set their own minimum credit score thresholds, so there is no industry standard. Manually-underwritten loans through Fannie Mae have a minimum score requirement of 620, for example, but exceptions are made for borrowers with no credit score at all.

FHA: In order to qualify for an FHA-insured mortgage loan, you’ll need to have a minimum credit score of 500. Higher credit scores can qualify you for lower down payment requirements, as well.

VA: A VA mortgage loan is available to eligible active-duty, veteran and reserve military members, as well as certain surviving spouses. This program has no minimum credit score requirement, but instead requires lenders to consider the applicant’s entire credit history and profile before making a decision.

USDA: Many USDA loan lenders have credit score requirements starting at 640. However, there is no mandatory credit score minimum with this loan program, and applicants with poor credit or no credit score can also be considered, if they can demonstrate creditworthiness in other ways.

Conventional loan programs will also not allow you to buy a second home or investment property if you don’t have a credit score. FHA, VA and USDA loans are only allowed on primary residences, so you wouldn’t choose those programs to purchase anything but a home you will live in.

Here’s how different common programs handle potential borrowers without a credit score.

Conventional loans

Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages in the residential housing market. The conventional loan programs they offer require higher credit scores than government loan programs, and less total debt compared to your income, which is also referred to as your debt-to-income (DTI) ratio.

While they do allow for approvals if you don’t have a credit score, there are additional restrictions.

Down payment minimum

Conventional loans offer down payments as low as 3%, but borrowers with nontraditional credit histories will not be able to take advantage. In most cases, conventional borrowers will need to make a 10% down payment if they don’t have a credit score.

However, Fannie Mae’s HomeReady® and Freddie Mac’s HomePossible® loans offer those with nontraditional credit histories a down payment minimum of 3%, if the borrower otherwise qualifies for the loan.

Reserve requirements

Mortgage reserves refer to the numbers of monthly payments you could make with money left over in your checking or savings account after your down payment and closing costs clear. This is money you could use to make mortgage payments. With most Fannie Mae and Freddie Mac programs, if you have a credit score of at least 680 and are putting 3% down, you aren’t required to have monthly reserves.

With nontraditional credit, you will need as much as 12 months’ worth of payments as reserves, depending on your down payment and DTI ratio, and whether you can document a rental payment history. That means if your new monthly payment is $1,000 per month, you’ll need to have up to an extra $12,000 in the bank to close the loan if you don’t have a credit score.

DTI ratio maximums

The debt-to-income (DTI) ratio maximum is 43% for most conventional programs, but approvals may be possible up to 50% with qualifying credit scores over 680. With nontraditional credit, the DTI ratio is capped at 36%.

Private mortgage insurance

Private mortgage insurance, also known as PMI, is required on mortgages if you are making less than a 20% down payment, and protects the lender in the event that you default. On conventional mortgages, the amount of monthly mortgage insurance you pay is influenced by your credit score.

With nontraditional credit, the monthly mortgage insurance you pay is similar to what you would pay for having the lowest credit scores Fannie Mae allows. For example, if you take out a $150,000 loan on a purchase with a 5% down payment, you would pay $121.25 a month in mortgage insurance with a 620 credit score or no credit score. 

With a 680 credit score, the monthly mortgage insurance would only be $58.75 a month, which is a savings of $62.50 per month. Even if you have a perfect nontraditional credit history for all of the accounts you provide, the mortgage insurance rate card will treat your credit as if you have a credit score on the lower side of the range.

FHA loans

The Federal Housing Administration (FHA) insures loans with more flexibility for credit and DTI. It also allows for nontraditional credit histories, although the requirements are slightly different than conventional mortgages.

A nontraditional credit report is required

The FHA does require an independent third party credit report to verify any nontraditional credit information that you provide. All credit providers, including your rental reference, must be verifiable by an outside company — if you rent from a family member or friend, you won’t be eligible for the loan.

In most cases, you’ll need to be able to provide a 12-month payment history from three of the following sources of nontraditional credit to be considered for an FHA loan with no FICO scores:

  • Rent
  • Telephone
  • Gas, electricity, water, television service or internet service

The rent history is mandatory, but if you don’t have two more that are housing-related, the FHA will also consider the following:

  • Insurance premiums that aren’t deducted from your payroll (renters insurance, life insurance)
  • Childcare payments
  • School tuition
  • Payment on medical bills not covered by insurance
  • 12-month documented history of regular cash deposits into a savings account that were at least made quarterly, and were not deducted from a paycheck. The period cannot include nonsufficient funds (NSF) penalties
  • A personal loan with terms in writing and a 12 month payment history at a regular, set amount

The payment history cannot reflect late payments in the last 12 months and no more than two 30-day late payments in the last 24 months on all other provided account histories.

Down payment and debt-to-income ratios

Without a credit score, the FHA will not allow the total debt ratio to exceed 31% for the monthly payment compared to income, and 43% for total debt divided by income. This is a more strict requirement than the allowances for borrowers with credit scores, with exceptions sometimes available up above 50% with a high credit score.

The standard down payment of 3.5% is allowed for borrowers with no credit score, and there are no additional restrictions.

FHA mortgage insurance without a credit score

One advantage of an FHA loan over a conventional mortgage is the mortgage insurance is the same regardless of credit score. FHA mortgage insurance is calculated based on current HUD guidelines and does not vary based on FICO Score, or a lack thereof.

With FHA loans, you pay two forms of mortgage insurance. One is the upfront mortgage insurance premium which is a lump sum amount of 1.75% financed onto your loan amount if you make a minimum down payment of 3.5%. The annual mortgage insurance is between 0.80% and 1.05% for a loan term greater than 15 years, depending on the loan and down payment amount. It is paid monthly for as long as you have the loan. 

VA loans

The Veterans Administration provides eligible active duty and veteran members of the military with home loan benefits that are very different from conventional and FHA loans. The most notable differences are there is no down payment requirement and no credit score minimum, as the VA recognizes that often recently discharged veterans who were on overseas tours of duty may not have developed a credit history. That gives the VA loan a built-in system for approving exceptions for veterans with no FICO Score.

As long as the veteran can provide proof of recent rental history, and additional payment records including a history of payments on utilities, car insurance or other expenses the veteran has paid, a VA loan approval is likely.

VA mortgage insurance

Unlike conventional loans and FHA loans, a VA loan with less than a 20% down payment does not require mortgage insurance. A funding fee may be charged instead, and it is usually financed onto the loan amount.

The VA funding fee varies based on how much the veteran is putting down and whether they’ve used their home loan eligibility or not. For veterans with service related disabilities, the funding fee may be waived completely.

USDA loans

The U.S. Department of Agriculture (USDA) offers mortgage loans to people in low income areas of the country, usually in rural areas. One of the features of the program: no requirement for a down payment.

Like FHA loans, the USDA will allow borrowers to obtain a loan with no credit scores. In most cases, they prefer a traditional credit report, but a rental history, plus three additional trade references, may be acceptable as long as they have a 12-month payment history and the credit source can be verified independently.

USDA mortgage insurance

USDA loans don’t have mortgage insurance impacted by credit scores. There are guarantee fees, not to exceed 1% of the loan amount upfront and 0.35% of the loan amount annually, regardless of credit score or lack thereof.

How to prove your credit without a credit score

In many cases, lenders will accept alternative credit histories if you don’t have the types of accounts that show up on the credit bureau reporting systems.This nontraditional credit history involves verifying your payment history on other obligations you have over the past 12 months, including contact information for all the people you’ve paid.

Keep in mind that this alternative payment history must be spotless. If there is anything derogatory on your report, like medical collections or unpaid utility bills, you won’t be eligible for alternative credit options. Here’s how a nontraditional credit history works and what lenders look for.

Rent payment history

Absent a credit score, a lender will be most interested in how you’ve managed your rental payment history. The most recent 12 months of rent will be an indicator of whether you’re likely to pay a new mortgage on time.

You’ll need to provide a 12-month payment history with canceled checks or bank statements verifying your on-time payments. A copy of the lease will also be necessary to show that you were complying with the terms of a legal agreement, much like you will be when you obligate yourself to a mortgage.

Cash payments won’t work, and if you’re renting from a relative or friend, this won’t be acceptable for alternative credit underwriting.

Utility bills

Another sign that you are ready to buy a house is proof that you’ve paid utilities at your current residence on time. Again, you’ll have to show that the payments came out of your account with canceled checks or bank statements.

The utility bills should also show up in your name. If they don’t, you won’t be able to use the account as one of the options for your credit.

Other nontraditional credit items

In addition to having at least two housing-related items, lenders will want at least two to three other monthly payment histories to show that you can manage your obligations.

You’ll need 12 months proof of two to three of the following:

  • Cell phone bill
  • Cable bill
  • Car insurance
  • Life insurance

Any type of account that you pay monthly and have had for at least 12 months in your name will usually be acceptable for the additional credit items needed. In most cases, you won’t be eligible if you’ve had more than one 30-day late payment within the last 12 months of payment history.

How lenders verify nontraditional credit histories

Even with documentation provided by the potential borrower, lenders will generally take additional steps to verify the payment history. Often, this comes in the form of an Anthem Report — a type of nontraditional credit report that can be provided to independently verify all the information if you aren’t able to provide canceled checks or bank statements for alternative credit accounts. This will generally only work if the accounts that need to be verified are verifiable through a third party.

For example, the credit reporting company can contact a property manager if you rent an apartment in an apartment complex, or can get a payment history directly from an electric or cable company. Some lenders may require this in addition to the documents you provide, so that all of the information is verified.

Your lender will indicate if an Anthem Report is necessary, and they will order the report. You will need to provide them with the name, contact number and account information for each item for the report to be completed, and may need to provide some of the proof of payment documentation needed to produce the report.

What are some reasons you might not have a credit score?

In order to have a credit score, you must actually have credit that can be scored by the major credit bureaus. This can come in a number of forms, including student loans, credit cards, auto loans and charge cards.

The credit agencies use an algorithm that examines these accounts in a number of ways. The most important is payment history. But the score also includes how many accounts you have open, how often you pay them, how much you pay each month and the types of accounts you have. The resulting credit score is a reflection of how you paid current and past credit obligations, and serves as a benchmark for how likely you are to manage new credit.

Bad credit vs. no credit

In the eyes of a lender, having bad credit is very different from having no credit. A borrower with no credit score is simply someone who has not held credit-based and/or bureau-reported accounts in the past. They lack an official score even though they may have demonstrated financial responsibility for years.

A borrower with poor credit, on the other hand, is someone who has failed to meet their financial obligations as required. This could mean making late payments, holding delinquent accounts, or carrying too-high of balances. From a lender’s perspective, having limited or no official credit history is better than having a history of mismanagement.

Here are some reasons you might not have a credit score.

You Use cash instead of paying for things with traditional credit accounts 

This may be something you grew up with, or a byproduct of previous bad experiences with credit. There is also a growing movement of financial advisors who advise against using credit at all.

You haven’t used credit in the last 24 months

This often happens to elderly people on a fixed income who don’t use credit often. Or maybe you’re an active duty member of the military who was on an extended tour of duty and didn’t use any credit for several years.

You are young and don’t have credit experience

Recent high school graduates often fall into this category, as they may not have had any need for credit if they’ve been living at home.

You are a new immigrant to the country with no U.S. credit history

If you recently immigrated to the United States, it will take a while to start establishing a credit history. Until you have 60 to 90 days of activity on any type of credit account, it’s unlikely that you’ll have a credit score.

How to build credit

Although you can qualify for a mortgage without a credit score, you’ll have more options and fewer restrictions if you actually have a credit score. Here are some simple ways to start building a credit history.

Get a secured credit card: Your local bank may offer an option for you to deposit some money into an account, and then use it as a backstop to be issued a credit card. The longer you use it, the more credit you build, until eventually you have enough of a score history to apply for regular unsecured cards.

Pay bills on time: Once you’ve opened credit cards, pay them on time. Payment history makes up the biggest part of your credit score, and paying on time is the best way to build up a solid credit score.

Open a regular credit card: Once you’ve got some credit history established, you can open a credit card, and then use it sparingly. Keep in mind that just having the card doesn’t generate a score — you must actually use it and make payments to drive the score.

Become an authorized user on a credit card: If you have a friend or family member who is willing to let you be an authorized user on their card, you can build some credit history. However, use it with caution: Your payment decisions will also affect the person you are authorized to use the card with, so your late payments become their late payments.

Take out a credit builder loan: These are offered by banks, credit unions and online lenders, and involve the bank depositing a small sum of money into a savings account or CD for the borrower, without actually being able to access it at first. The borrower makes payments on the balance over a set period, usually six months to two years, and receives the money after the payments are made.

 

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