No Credit Check, No Mortgage
No mainstream mortgage lender will grant you a home loan without pulling a mortgage credit report. And you’ve probably heard that old saying, “It takes credit to get credit.”
But that’s not the whole story.
A “tri-merge” mortgage credit report is the go-to choice of lenders. That’s because it’s fast and reasonably accurate for most people. But they must fit the profile of an upright financial citizen.
But that’s not the only way of proving that you deserve a mortgage. Today, everyone can enhance their credit reports and scores with non-traditional credit.
Traditional Vs. Non-Traditional Credit
“Traditional” credit refers to companies that ordinarily report their accounts receivable to Experian, TransUnion and Equifax. Banks, mortgage lenders, auto finance companies and credit card accounts generally fall into that category.
In most cases, landlords, utility companies, layaway accounts, rent-to-own outfits and secured credit cards do not report. Lenders consider these accounts “non-traditional.”
For a very long time, traditional credit reports excluded many people who were perfectly fine credit risks. It’s more difficult for consumers with “thin files” to get financing. That’s because auto, mortgage and other underwriters rely on simple FICO scores that make lending decisions easy.
This is a problem for potential buyers, of course, but it’s also a problem for lenders. Without better information, lenders are missing the opportunity to make more loans.
Mortgage Credit Report: What’s Wrong With Thin Files?
First, credit reports have historically been incomplete. For instance, single-family homes used as rentals are often owned by individual investors.
In many cases, investors do not report rental payments to credit bureaus. On-time payments are positive items that can help raise credit scores. Mortgage lenders, on the other hand, almost always report. A clean mortgage payment history is considered very positive for credit scoring.
Second, non-traditional accounts may only be reported if the history is negative. If you make all of your payments to a payday lender, for instance, you do not benefit in terms of a better credit score. (The Consumer Financial Protection Bureau says payday loan activity rarely shows up on credit reports.)
However, if you do not repay the debt, and it goes to a collection agency, that will likely end up on your credit report and harm your score.
In effect, heads you lose, tails you lose.
Multi-Generational Households Affect Credit Scoring
Third, growing numbers of people are living at home with parents. A 2014 Pew Research study found that for the first time in more than 130 years, adults ages 18 to 34 were more likely to be living in their parents’ home than with a spouse or partner in their own household.
Such individuals may well have jobs and income. However, they often do not show up on rental records or have accounts with cable companies or utilities.
When your “good” history is invisible, any mishap that is reported has a much greater effect. If you have ten years of perfect payment history with a mortgage, auto loan and credit cards, one $15 collection or late payment is unlikely to do serious damage.
Folks with thin files do not get the benefit of the doubt.
Credit Invisibles Versus Unscorables
Because of limited or nonexistent credit report activity, individuals are often classified as “credit invisibles” or “unscorables.”
The government says that “by the standards of more traditional credit scoring models, an estimated 26 million consumers were credit invisible in 2010, and an additional 19 million were considered unscorable.”
In basic terms, a “credit invisible” is someone who is effectively unknown to a credit reporting service, while an “unscorable” is known to credit bureaus.
Unscorable consumers just have so few credit marks that it’s not possible to determine a credit standing. In other cases, the credit history is so old that the data is insufficient or stale.
Getting Non-traditional Data Into Your Mortgage Credit Report
Given that 45 million people are being excluded from the credit system because of insufficient data, it follows that there should be some interest in having them show up on credit systems.
That has now begun to happen because of a new generation of credit scoring programs.
Credit reports increasingly include rent, utilities, and telephone payment histories. FICO began incorporating utility payment data in 2015 from an Equifax database of telecommunications and utilities providers.
Manual Mortgage Underwriting And Non-Traditional Credit
Even if you have too little data on your traditional mortgage credit report, you can still qualify for a mortgage. Fannie Mae’s guidelines, for example, state, “If one or more borrowers do not have a credit score due to insufficient credit, the lender must establish an acceptable nontraditional credit profile.”
For these loans, underwriters must obtain rental payment histories and utility payment histories. Even regular deposits to a savings account show financial responsibility.
(Suggestion: Always keep at least your last 12 rent payment checks so they can be provided to a mortgage lender. Your landlord does not provide data to credit reporting agencies.)
Manually-underwritten loans are subject to stricter guidelines, however. In addition, if the borrower uses nontraditional credit to qualify, he or she must complete pre-purchase homeownership education.
Ask Lenders For Help
If you suffer from low credit scores, check again to see if they have improved. Ask how non-traditional credit is handled. Offer to provide canceled checks, invoices and bills as necessary. Of course, you should hold onto such documentation in case lenders want to see it.
What Are Today’s Mortgage Rates?
Mortgage rates are often dependent on your credit score. However, not all programs penalize those with thin files. Check with several lenders to see who is most willing to work with you and offer a good deal.