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How to Get a Mortgage with No Credit Score
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Most mortgage programs include minimum credit scores to qualify — so understandably, most people believe that not having a credit score at all will disqualify you from a loan.
But the truth is you can get a mortgage, even without a credit score. You’ll just have to prove that you are creditworthy in other ways, and there are several different options to demonstrate this that extend beyond the standard FICO scoring system.
We’ll discuss some of those options in this article.
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 look at 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.
Here are some reasons you might not have a credit score.
You don’t use traditional credit accounts, instead of paying for things in cash
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, popularized by experts such as Dave Ramsey.
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 awhile 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 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 non-traditional 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 non-traditional 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.
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 non-traditional 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 non-traditional 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 non-traditional 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.
Loan programs that allow for mortgage approval with no credit score
While it’s certainly possible to get a mortgage without traditional credit scores, the guidelines may be different depending on the type of loan you are applying for.
Most loan programs for people without credit scores are restricted to new purchases or refinances where no cash is being taken out. The property generally must be a single-family residence.
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.
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 ratio (DTI).
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 non-traditional 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 non-traditional credit histories a down payment minimum of 5%, if the borrower otherwise qualifies for the loan.
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 non-traditional credit, you will need as much as 12 months worth of payments as reserves, depending on your down payment and debt-to-income 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.
Debt-to-income ratio maximums
The debt-to-income ratio maximum is 36% for most conventional programs, but approvals may be possible up to 50% with qualifying credit scores over 680. With non-traditional credit, the debt-to-income 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 non-traditional 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 $157 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 $106 a month, which is a savings of nearly $50 per month. Even if you have a perfect non-traditional 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.
The Federal Housing Administration (FHA) insures loans with more flexibility for credit and DTI. It also allows for non-traditional credit histories, although the requirements are slightly different than conventional mortgages.
A non-traditional credit report is required
We discussed the anthem report above, and FHA does require an independent third party credit report to verify any non-traditional 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 non-traditional credit to be considered for an FHA loan with no FICO scores:
- 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 insufficient 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.
One important note about FHA loans: You pay two forms of mortgage insurance with an FHA loan.
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 0.85%, and is paid monthly for as long as you have the loan, assuming you make the minimum down payment of 3.5%.
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 difference is there is no down payment requirement.
The other difference is there is 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.
The United States Department of Agriculture offers 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 non-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 loans do not have mortgage insurance impacted by credit scores. There is a 1% guarantee fee, and an annual fee of 0.35% of the loan, regardless of credit score or lack thereof.
Ways you can start building a credit score
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.
- Secured credit cards: 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.
- 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.
Not all mortgage companies will offer no credit score underwriting options or Anthem reports, even if they currently offer VA, FHA, Conventional, or USDA loans. If they do offer the non-traditional credit underwriting option, it may only be on select programs.
Be sure to talk to your loan officer first, and be prepared to provide the documentation needed to verify a non-traditional credit payment history.