If you haven’t borrowed much or used credit cards in the past, your credit report might have little or no information. This is known as a ‘thin file’ in the industry.
Multiple loan programs today will accept buyers with no credit score at all, as long as they can afford the upfront cost and monthly mortgage payments. Here’s how to get approved.
Buying a house with no credit
First–time home buyers have never had a mortgage, may own their car outright, and may reach for debit cards over credit cards when given the chance.
These three traits put first–time buyers “off the credit grid” and can make qualifying for a mortgage a bit of a challenge.
Call it the unintended consequence of debt–free living: with no visible evidence checkless payday loans in Henderson Tennessee that you’ve managed credit accounts in the past, mortgage lenders will be nervous about your ability to repay a loan. There’s no history for them to go on.
The FHA mortgage is available to first–time home buyers with ‘thin credit’ or no credit whatsoever. Most mortgage lenders are approved by the Federal Housing Administration to offer these loans.
Conventional loans, VA loans, and USDA loans may also be an option. The rules may be a little stricter for borrowers with no credit history, but it’s possible to get approved if you find a willing lender.
You can get around not having a credit score. But lenders still need proof you’ll make good on the loan. They want to know they’re making a sound investment.
Just like other borrowers, you’ll need to document your personal finances to show you can afford the mortgage. For example, lenders will want to see:
- Steady employment
- Steady income documented by personal tax returns
- Savings for the down payment and closing costs
- Cash reserves in case of emergency
- Bank statements showing your assets
And, in place of a traditional credit report, lenders may consider other financial obligations that typically don’t show up in your credit history.
You might be able to prove you’re a responsible borrower via on–time rent, utility, cell phone, or internet payments, for example. Rent payments are an especially good indicator of whether you’ll keep up with future mortgage payments.
To verify rental history, the lender will request a ‘VOR’ or verification of rent from your current (and possibly previous) landlord(s). This form shows the rent amount, how long you’ve lived there, and whether you were late on any payments. A strong VOR can make a big difference in your lender’s approval decision.
But rent history isn’t the only important factor. Be sure to pay any other bills you have on time and in full, as this could make or break your mortgage application.
FHA loans don’t require traditional credit
Building credit takes time. If you’re ready to buy a home but you lack a credit score, waiting until you’ve built up a worthwhile credit history could feel slow and frustrating.
The better, faster solution is to seek out mortgage loans meant for borrower with little or no credit to their name. The FHA mortgage is one such option.
As the Federal Housing Administration states on its website: “The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application.”
Instead of turning away borrowers who have not had a chance to build a credit history (or who have preferred not to), FHA mortgage guidelines instruct lenders to look at all aspects of a mortgage application.