Do you long to purchase your own home but worry that you don’t have enough credit? Don’t let your lack of credit impede your ability to purchase a home, even if having a decent credit score is often a necessary need for approval for a mortgage. Let’s look at the possibilities open to first-time house purchasers without credit histories.
Does Credit Matter When Buying a Home?
Let’s start with a simple response. No, credit is not necessary for home purchases. Your chances of being approved for a mortgage can be increased if you have a solid credit history and score. But there are lending choices if you want to buy a house but have no credit.
While the precise credit score required to purchase a home will vary on your lender, the following ranges represent average requirements for various home loans:
- Standard mortgage: 620 or above
- FHA loan with 3.5% down: minimum score of 580 (At Rocket Mortgage®, this is the minimal score requirement)
- FHA loan: 500 or higher with participating lenders; 10% down
- 580 or higher for VA loans
Your chances of obtaining a loan with better conditions and lower interest rates can be increased if you have a solid credit history. But what occurs to buyers who have poor or no credit? Let’s look at it.
Bad credit versus no credit
There is a significant difference between having bad credit and no credit. A home buyer with no credit has no credit history or record. An individual with poor credit has a credit history, although it is probably marred by earlier errors.
Lenders are unable to determine or assess your likelihood of adhering to the terms of your loan if you have no credit. Lenders will view your lack of credit as a risk even if you make a consistent salary because you have no history of repaying debt. A score below 600 on a scale of 300 to 850 is frequently used to describe a poor credit score. You might discover that certain lenders are hesitant to give credit if your credit score falls into this group. A house buyer may find it simpler to qualify for a mortgage with no credit than with bad credit due to the fact that a low credit score can prompt lenders to raise red flags.
How To Buy A House If You Don’t Have Credit
We can certify that prospective buyers can buy a home even if they have no credit history. Let’s now examine the process.
Manual Underwriting Process
Your mortgage lender will go through the underwriting procedure to confirm your income, job, debt, and financial history before deciding whether or not to approve you for a house loan. Traditional underwriting uses an automated computer procedure, whereas manual underwriting is carried out by hand. This is how manual underwriting differs from traditional underwriting. Because manual underwriting enables lenders to confirm payment history in other ways, it is the best option for home purchasers with no credit. To confirm that you pay your bills on time each month, you can ask your landlord, insurance provider, utility providers, and others for documentation of on-time payments.
Put A Big Down Payment On It
Your likelihood of being approved for a mortgage may go up if you make a sizable down payment. Most purchasers put down at least 5% of the purchase price, but the more you put down, the less of the home’s total worth you’ll need to borrow. You may be eligible for a mortgage even if you have no established credit history if your lender can confirm that you will probably be able to make your monthly payments easily.
Get a Co-Signatory
A co-signer is someone who consents to sign your loan documents alongside you and take on your debt should you default on payments. For purchasers without credit, using a co-signer can be useful, but co-signing a mortgage is a hefty commitment. A co-signer for a mortgage must have strong credit and a clean credit history.
Investigate Alternative Lenders
Small or online banks, credit unions, and other nontraditional lenders frequently have more permissive lending rules than large banks. These lenders may therefore be more inclined to accept mortgages for property purchasers who have no history of good credit. Look around for lenders to see what they require, then get in touch with one to see if you can negotiate.
Alternatives To Mortgage For First-Time Homebuyers Without Credit
We’ll look at the mortgage alternatives for first-time home buyers with no credit now that you know there are ways to buy a property without credit.
A “conforming” mortgage loan is one that complies with the standards of Fannie Mae or Freddie Mac, the two government-sponsored organizations that buy mortgages from lenders and resell them to investors. Borrowers with no history of credit must fulfill the following criteria in order to be approved for a conventional mortgage loan:
- Borrowers must have a debt-to-income ratio (DTI) that is no more than 36% without a credit score.
- Borrowers who have no credit history must make a down payment of at least 10%. The 3% necessary for some credit ratings is a lot lower than this amount.
- Cash reserves: Before closing on a home, borrowers must have 12 months’ worth of mortgage payments in the bank. Without a credit score, your traditional loan’s private mortgage insurance will be the same as it would be if you had the lowest permitted credit score.
Loans from the FHA
A mortgage that is backed by the Federal Housing Administration is known as an FHA loan. When they might not otherwise be able to, these loans enable people to buy a property. Although the FHA permits lenders to take into account borrowers with no established credit by finding alternative ways to confirm an applicant’s history of on-time payments. This program often caters to first-time home buyers.
Additionally, there are often two forms of mortgage insurance needed for FHA loans. You’ll be required to make monthly payments for mortgage insurance in addition to an upfront charge of 1.75%.
For you to be eligible for an FHA loan, you must:
- 3.5% down and a minimum 580 credit score are required.
- 10% down payment, participating lenders, and a credit score of at least 500
- 43% or less of income relative to debt
A mortgage sponsored by the Department of Veteran Affairs is known as a VA loan. Veterans who have served for the required amount of time are eligible for these loans. Although most lenders have a mandated minimum score, the VA does not have a minimum credit score that must be met in order to qualify for a VA loan.
A mortgage that is backed by the U.S. Department of Agriculture is known as a USDA loan. Those with low to moderate incomes who reside in a rural location that meets the criteria can typically apply for these loans.
However, using the manual underwriting procedure, buyers without a credit score may be eligible for a USDA loan as long as they can demonstrate at least 12 months of payment history in another way. USDA loan providers normally require a credit score of at least 640 for these loans.
How To Improve Credit To Be Eligible For A Mortgage
There is no doubt that people without credit histories can buy a home. Building credit, however, can increase your alternatives for home loans and help you qualify for better rates. Take into account the following advice if you wish to improve or establish your credit in order to get approved for a mortgage:
Become a credit card holder’s authorized user. Adding yourself as an authorized user to a family member’s or friend’s credit card is one of the simplest ways to establish credit. You have zero liability and little risk when you use the credit of the primary account holder as an authorized user to build your own credit history.
Apply for a credit-building card. A credit builder card is an excellent place to start if you’re ready to open a credit card. People with little or no credit history or low credit scores should use credit builder cards. As a result, they have high annual percentage rates and low credit limits. These measures assist lenders in lowering the likelihood that they would suffer financial loss if the cardholder is unable to make payments.
Co-signer credit card applications are accepted. Applying for a credit card with a co-signer is an additional choice. By co-signing, two people can share a single credit card account and the associated credit history. Co-signers are equally liable for the credit card and its payments, unlike authorized users who don’t make them. Co-signing hence has a higher potential for risk than becoming an authorized user.
The Verdict On Purchasing A House Without Credit
Start working to establish your credit history, but don’t worry that it will keep you from owning a home. With no credit history, it is possible to buy a home. Apply for a mortgage online to learn more about your financing possibilities and take the first step toward becoming a homeowner.