No credit cards, no loans, no debt at all! Living debt free is a great idea, and one that is lauded by financial gurus everywhere. There really can’t be any disadvantages to living debt free, right? Well, that’s probably true for most people, but you’ll soon discover that no debt these days basically means no credit. And buying a house with no credit can be a bit tricky, to put it mildly.
Your credit history is established when creditors and lenders report your payment activity to the three major credit bureaus. Your payment history as a whole is used to determine whether you are a good or bad credit risk. Obviously, a poor payment history, riddled with missed and late payments, is a red flag to lenders, and people with bad credit rarely get mortgages.
It’s understandable why lenders choose to shy away from people with bad credit, but why shun people with no credit at all? You’d think that living debt free would show lenders that you’re financially responsible enough to not drown yourself in debt.
Unfortunately, it won’t be until you’re trying to buy a house with no credit that you realize that living completely debt free does have at least one major drawback. Since lenders can’t see your payment history they can’t evaluate whether you’d be a good credit risk or not. When it comes to people with no credit history, the vast majority of lenders will err on the side of caution and assume that you’re a bad risk.
But, all hope is not lost for people trying to buy a house with no credit! It may be a bit more difficult to get a mortgage with no credit, but it certainly isn’t impossible. Let’s explore some options, shall we?
1. Look into smaller lenders and credit unions.
Large well known lenders often seem more trustworthy to some buyers. They’ve been around forever, and they probably know just what they’re doing in the real estate and loan game. While this is usually true, big lenders—like Wells Fargo, JPMorgan Chase, and Bank of America—often don’t have the time for consumers who are trying to buy a house with no credit. Bigger lenders have stringent requirements that they must stick to, with a documented positive credit history topping the list.
Smaller lenders, on the other hand, like local banks, may have less stringent credit requirements. If you’ve done business with a smaller bank for years, you may even have a much better chance of getting a home loan with no credit. Keep in mind that these smaller banks usually have limited options for home loans and you’ll probably have fewer options and possibly less favorable loan terms at smaller banks compared to national lenders.
2. Ask about manual underwriting.
Underwriting is the process in which a lender determines whether or not a potential borrower qualifies for a loan. This usually involves checking credit histories and verifying information, such as employment. Most lenders today use an automated underwriting process with a loan officer inputting data into a complex computer software program. This method is much faster and easier than manual underwriting.
Manual underwriting, on the other hand, requires an actual underwriter to manually check and verify each piece of documentation submitted by the borrower. This process is much more time consuming, meaning that the loan process takes much longer. However, manual underwriting is sometimes the only way that some borrowers can buy a house with no credit.
If you have little to no credit, ask possible lenders about their underwriting process, particularly if they use automated or manual underwriting. Check with smaller lenders first when looking for a lender who will consider manual underwriting, since these smaller lenders are usually more likely to consider this alternative. If you do find a lender who will do a manual underwrite mortgage, be prepared to…
3. Put together an alternative credit history.
Don’t expect any lender to just hand over a check if you want to buy a house with no credit. (And if they do, they’re probably loan sharks; steer clear!) Reputable lenders will want to see proof that you pay your bills on time and can handle financial obligations. Chances are, you’ll have to put together an alternative credit history. An alternative credit history consists of regular payment accounts that are not found on traditional credit reports.
It can include items like rent receipts, utility bills, cell phone bills, insurance payments, and even self-storage payments. The more examples of monthly payment accounts in good standing that you can provide, the better. It may seem like a lot of legwork and paperwork, but it can definitely be worth the time and effort if you’re trying to get a home loan with no credit in the traditional sense.
4. Put down a large down payment.
Most mortgages require borrowers to put a small percentage of their own money down on a property in order to qualify for a home loan. Putting a nice chunk of their own change down on a home reduces the chances that a home buyer will default on the loan. A down payment of 20% of the purchase price of the home is often thought to be the traditional down payment amount, but borrowers today rarely need to plunk down that hefty of an amount. There are a couple of options for no down payment mortgages, like VA loans and USDA Rural Housing loans, and some low down payment mortgage options, like FHA loans and HomeReady Mortgages.
Buyers with no credit, though, most likely will not have the option of a low or no down payment mortgage. When trying to buy a house with no credit, a general rule of thumb is the bigger the down payment, the better. Try to come up with at least the traditional 20% down payment, if not more. Many lenders will see buyers who are willing to put more of their own money up front as less risky.
5. Build up your traditional credit.
Finally, you may want to consider building up your traditional credit history before trying to purchase a home. This may be the best and easiest option for buyers who truly have no credit as opposed to bad credit. Of course, building traditional credit takes time, so don’t expect to qualify for a home loan right away if you choose this option.
Most lenders want to see a positive credit history with at least two tradelines for at least 12 months. These requirements may vary depending on the lender, though, so contact a few lenders and ask about their requirements. Even without a credit history, you should be able to open a few tradelines that will report to each of the three major credit bureaus, like secured credit cards and retail store credit cards. Use your new credit responsibly, make on time payments, and keep your credit utilization low, and you should be on your way to good credit—and a home loan—in no time at all!