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 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.
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.