First-time home buyers guide: Getting a mortgage when you have no credit
Getting a mortgage when you have no credit
First-time home buyers face challenges that more experienced home buyers do not.
For example, a first-time home buyer may not be able to show the same stable work history that a more experienced buyer can show; and a first-time home buyer may not have as much money saved.
But, perhaps, the biggest difference between a first-time home buyer and an experienced one is that first-time home buyers are less likely to have credit history.
First-time home buyers have had no 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 getting mortgage-approved a bit of a challenge.
Call it the unintended consequence of debt-free living: with no visible evidence that you’ve managed credit accounts in the past, mortgage lenders become (rightfully) nervous about your ability to repay on a loan — there’s no history for them to go on.
Thankfully, you don’t need a traditional credit profile to get mortgage-approved.
The FHA mortgage is available to first-time home buyers with “thin credit” or no credit whatsoever, and FHA-backed mortgages are available from nearly every mortgage lender.Verify your home buying eligibility (May 24th, 2019)
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If you’ve been living without debt, mortgage lenders become nervous about your ability to repay on a loan — there’s no history for them to go on. If you are a home buyer with little or no credit history:
- Pull your credit report to make sure there aren’t any inaccuracies that could be negatively impacting you without your knowledge.
- Don’t seek out a credit card or car loan if you’re hoping to buy a house soon; seeking new credit lines is seen as a negative in credit bureaus’ credit score algorithms, and it takes time to build up a credit history.
- Consider an FHA mortgage, which is available to first-time home buyers with “thin credit” or no credit whatsoever.
What is a credit report?
A credit report is a written account of all creditor accounts which belong, or have belonged, to a person in their lifetime.
Credit reports are a compilation of information from credit bureaus, which are companies to which creditors report borrower payment history on a regular basis.
In the mortgage space, there are three main credit bureaus — Experian, Equifax, and TransUnion. Each bureau uses the information available to it to assess your individual credit score.
A credit score is a numerical representation of the likelihood that you’ll stop paying on your mortgage. The higher your credit score, the more likely you are to make payments.
The algorithm which uses your credit report to determine your credit score is cloaked; we don’t know how each line item affects the final score. However, we do know that your payment history is the single biggest factor in determining your credit score.
It’s why first-time home buyers rarely have credit scores that are “excellent”. There’s just not enough history of managing credit and making payments to make that kind of determination.
It’s okay to have less-than-perfect, though. It’s even okay to have no credit. As a first-time home buyer, you can still get mortgage-approved.Verify your home buying eligibility (May 24th, 2019)
FHA mortgages don’t require “traditional” credit
First-time home buyers tend to carry credit scores which are lower than the general population.
Often, this is because first-time buyers have only a short history of managing credit, and payment history is the largest component of a person’s credit score.
The solution, though, is not to go out and get a credit card or two; or open up a car loan. This would actually do more harm than good to the credit score.
Seeking new credit lines is a negative in the credit bureaus’ credit score algorithms and, besides, until 12 months of payment history exist for each of the new accounts, the effect on a borrower’s credit score is heavily muted anyway.
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 FHA loan’s sponsor, 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.
This is good for first-time home buyers because FHA loans allow for a low down payment of just 3.5%, which can help a household with good income but less-than-optimal savings move from renting into homeownership.
And, there’s a large market for this type of loan, too. Some estimates put the number of credit-lacking consumers at more than 5 million nationwide.
Don’t let your lack of a credit score discourage you from purchasing a home. There are ways forward.
What are today’s mortgage rates?
Via the FHA mortgage program, first-time home buyers don’t need to show credit history — or even an active credit score — to get approved for a mortgage loan.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Verify your new rate (May 24th, 2019)