When you apply for a mortgage loan, the lender will look at many different factors. They will look at your debt-to-income ratio, as well as your current assets. They may also look at your work history, and your projected financial situation.
Your credit score, of course, is one of the many things they will look at.
But what if you don’t have a credit score at all? What if you have never borrowed money to purchase a car, never used student loans, and don’t have any credit cards? If you haven’t used debt, then you don’t have a credit score.
Many (but certainly not all) people think this is a huge problem. If you don’t have a credit score, they say, you can’t get a car loan or a mortgage.
But the truth is simple: you can get a mortgage loan even if you have no credit score. While a score (specifically a good score) increases the convenience of getting a high-quality loan, there are still options.
No Credit Score? No Problem! You Can Still Get a Mortgage Loan With These 3 Options
1. Conventional Loans (Fannie Mae)
A conventional loan is one of the most common types of home financing available. These are essentially loans that are purchased by Fannie Mae on the secondary market. Don’t worry, you don’t have to understand the specifics; all you need to know is that these loans have options for people with no credit.
According to Fannie Mae’s guidelines, if one or more borrowers on the application do not have credit, the lender will establish an “acceptable nontraditional credit profile.” During this process, the lender will check all the major credit agencies to ensure you don’t have a profile. This is basically the first step to make sure you don’t have a credit score.
If the lending agent verifies you don’t have a score, they will establish the credit profile. During this process, they will perform what’s known as manual underwriting. In this case, the property must be a one-unit principle residence, and the transaction must be for a purchase or limited cash-out refinancing. It will be restricted, of course, to the general loan limits of conventional loans, and the maximum allowable debt-to-income ratio is 36%.
If at least one borrower can verify past rent payments, there is no minimum reserve requirements. If not, at least 12 months of reserves will be needed.
2. FHA Loans
A loan supported by the Federal Housing Administration, commonly known as an “FHA loan,” is another option that you can use to secure a mortgage when you have no credit. If you choose this option, you will have to meet a variety of requirements that show your reliability as a borrower.
First, you will have to have no delinquencies on rental payments. Essentially if you have been a consistent renter who has made payments to your landlord on time, you will be fine in this area.
Next, you will have to have no more than one 30-day delinquency on other debts. Generally, this will mean debts that are not reported to the credit agencies; if they were reported you would likely have a credit score. This might include rent payments, which we have already covered, as well as utility payments, which are rarely reported to credit agencies. It may also include car insurance payments or other forms of monthly bills.
Finally, the lender or lending agent will check that you have no collection accounts, although there is an important exception. The FHA will basically ignore collection accounts related to medical expenses and medical-relate incidences. So if the only collection account is from bills caused by an emergency-room visit, it likely won’t impact your chances of securing an FHA loan without a credit score.
When all the calculations are made, all of your debts, including the future mortgage payment, will need to be 50% or less than your total income, and you will likely need at least a month’s worth of cash reserves. Essentially, if your mortgage payment is $1,500, you’ll need $1,500 or more in a bank account after downpayment and closing costs.
3. VA Loans
If you are a qualifying veteran, you could also use a VA loan without a credit score. This is a useful option for many veterans who have rented in the past and do not use credit or other debts to pay for items and services.
For a VA loan, the lending agent will have to create a credit profile just like we described for the conventional loans. However, this profile must include three credit references and at least one of the following:
- Rental payments
- Bills from telephone service
- Utility bills (gas, electric, etc.)
If this information is not available, the application may use a variety of materials to establish a credit profile. Insurance premiums, for example, are a useful document, as are payments to child care providers. School tuition can be used to establish your profile, and you can even reference retail store credit cards, such as card from an appliance store. If you have used rent-to-own services in the past, this could be useful for your application, and payments on medical bills are also a useful source of information.
Documenting a 12-month history of savings can also be used. This should include savings deposits that were made at least quarterly and were not payroll deducted. These payments should have caused no “insufficient funds” checks.
There is a variety of other information and documents that you can use, but the bottom line is this: even if you have no credit score, a mortgage loan is possible. Talk with an experienced lending agent and you’ll discover that there are plenty of options no matter what your credit situation.
Get the Right Loan for Your Needs, Even if You Have No Credit Score
Don’t let your lack of credit delay homeownership. Contact our staff today and we’ll do our best to help you get approved for an affordable loan on a top-quality house!
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