Mortgage With No Credit Score: Possible Before, Easier Now
While the average credit score for successful mortgage borrowers in February 2017 was 720, (and 686 for FHA borrowers), not everyone who made the cut had great FICOs. In fact, some were able to get a mortgage with no credit score at all.
High Credit Scores Improve Your Chances
When it comes to getting approved for a home loan, credit scores are one of the most important components.
Higher credit scores usually get you better interest rates and more loans to choose from.
Lower scores don’t necessarily kill your application, but they do make it harder to qualify. You may pay a higher rate, or have to make a larger down payment.
But what about prospective home buyers who have no credit scores?
No Credit Score = No Problem
Your credit is one of the most important qualifying factors used by mortgage lenders. This is because your credit history and your credit scores are pretty good predictors of how well you’ll pay your mortgage.
Without credit scores, it can be difficult for lenders to assess an applicant’s credit-worthiness, and ultimately whether they will repay their home loan as agreed.
Fortunately for people without credit scores, mortgage lenders can use a technique called non-traditional credit building. FHA and VA lenders, in particular, have underwritten this way for years. That’s one reason for their popularity with first-timers.
Non-traditional sources of credit history include:
- Rent payments
- Utility bills
- Cell phone
- Personal loan with written terms and cancelled checks
Lenders verify your payment history with those accounts, just the way they would an auto loan or credit card payment using a regular credit report.
Manual Vs Automated Underwriting
It’s great to be able to get a home loan through non-traditional credit. However, this technique has a few drawbacks.
To use non-traditional credit, you have to apply for a manually-underwritten mortgage. Manual underwriting means the underwriter verifies the loan documentation by hand — not just relying on software.
These days, most home loans are analyzed with the help of a computer program commonly known as an Automated Underwriting System (AUS).
Fannie Mae and Freddie Mac each have their own AUS version. Fannie’s version is known as Desktop Underwriter (DU), while Freddie’s is Loan Prospector (LP).
Automated mortgage software might issue an “Approved” decision. That means all you have to do is provide the items listed on your approval — like your latest paystub — and you’re usually good to go.
The software may also issue a “Refer with Caution” recommendation. This usually means that the software has declined your application, assuming that the information submitted was correct.
There is a third type of finding. It’s called “Refer.” When the AUS generates a “Refer” recommendation, it’s saying that there is not enough information for the software to complete its process and make a decision.
In that case, a “manual underwrite” may be the only solution for getting the loan approved.
The Problem With Humans
Guidelines for many loans are stricter when they can’t go through automated underwriting.
For example, you may have to make a higher down payment or settle for a smaller loan amount.
The automated underwritten approval, for the most part, “is what it is”. In other words, most lenders accept the AUS approval and its list of required documentation.
Freddie Mac No Credit Score Option
Some of the disadvantages of manual underwriting systems might not apply to applicants after June 26, 2017. Some Freddie Mac homebuyers without FICO scores may be able to qualify for financing via automated underwriting.
This is huge for no-score homebuyers. You will no longer be “downgraded” with limitations that are associated with manually underwritten loans.
There are a few minor caveats associated with being approved for Freddie’s new no-score mortgage loan:
- Transactions must either be home purchases or “no cash-out” refinances.
- Properties must be occupied as primary residences.
- Buyers must put at least five percent down.
- Loans must have fixed interest rates.
If you can clear these small hurdles, though, your loan experience will be a lot less stressful.
What Are Today’s Mortgage Rates?
By automating the assessment of people without credit scores, mortgage giant Freddie Mac continues to extend homeownership opportunities to many U.S. families.
Lenders can now use determinations made by automated underwriting findings. This is great news for many Americans who may not have been able to purchase a home before now.