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Getting a mortgage when you have no credit history or credit score is possible, but locating a lender and convincing them you can repay the loan will require some extra work on your part.
What Does It Mean to Have No Credit?
Having no credit, also known as being "credit invisible," means you don't have enough recent credit activity to get a credit score. Since checking a credit score is often the first step lenders take when evaluating your creditworthiness, the lack of a credit score can complicate the mortgage application process.
There are several circumstances that lead to lack of credit. The most common is lack of credit experience, which is something generally experienced by people just coming of age and entering the workforce. But retirees and others who have paid off debts and who haven't used a credit card or other financing in two years or more cannot be assigned a FICO® Score☉ or VantageScore® either. Recent immigrants to the U.S., even those with extensive credit histories in other countries, cannot get a credit score when they arrive in the U.S. because they have no credit files at the three national credit bureaus.
Important to remember, however, is that lack of credit is not the same as poor credit, and no credit score is not the same as a low credit score. A low credit score typically indicates a spotty history of credit management, marked by late or missed payments (at best), and accounts in collection, foreclosure or a recent bankruptcy (at worst).
Lenders view low credit scores as warning signs of potential trouble with loan repayment and may use them as grounds for declining loan applications or charging high interest rates to offset the risk of nonpayment. All things considered, it may be more difficult to get a mortgage with a very low credit score (below 500) than it would be to get one with no credit score.
Is It Possible to Get a Mortgage With No Credit?
It is possible to get a mortgage without a credit score, but it will require bypassing the automated mortgage application processes used by many lenders in favor of a more time-consuming process called manual underwriting. It will also require you to provide proof that you pay your bills on time by documenting payments not related to debt, such as rent and utility bills.
In contrast to automated mortgage underwriting, which uses credit scores as a "shortcut" to forecast the likelihood of repayment failure, manual underwriting requires a loan officer to personally review your financial documents to determine your creditworthiness. Specific requirements will vary from lender to lender, but you should expect to provide at least a couple years' worth of evidence that you've paid rent regularly and on time, and that you've also made timely payments for utilities, cellphone service or other recurring expenses.
You should also expect to document employment, income and perhaps other assets such as savings and investments, as you would in a regular automated mortgage application.
The extra time and expense of manual underwriting have made it relatively uncommon among mortgage lenders, so you may need to hunt around to find willing lenders. Small, local institutions, including credit unions, can be a good place to start (though credit unions typically require you to be a member to qualify). Some online lending sites and specialty mortgage lenders offer manual underwriting as well.
Mortgage Options for Those With No Credit
If applying with an acceptable credit score, an applicant with sufficient funds to make a 3% down payment and an adequate debt-to-income (DTI) ratio could qualify for a conventional mortgage at the lender's discretion. DTI measures the percentage of a borrower's monthly income that goes toward debt payments, and conventional mortgage lenders typically look for a ratio of 50% or less. In a manual underwriting situation, even with a solid track record of paying your bills, lenders will likely require down payments of at least 10% and a DTI ratio of no more than 36%. The lender may also require you to show proof that you have at least one year's worth of payments in your bank account.
If your down payment is less than 20% of the home purchase price, the lender may require you to pay for private mortgage insurance (PMI), which helps protect the lender in case you default on the loan. PMI can be removed from a conventional mortgage once you've made enough payments to own 20% of the home's market value. PMI pricing is typically set based on the borrower's credit score, so in the absence of a credit score, you should expect to pay the PMI premiums the lender charges to borrowers with the lowest credit score they'll accept.
If you're a first-time homebuyer planning to use the house you buy as your residence (as opposed to a vacation home or rental property), you may qualify for a mortgage backed by the Federal Housing Administration, otherwise known as an FHA loan.
FHA loans are designed to create opportunities for homebuyers whose credit scores are less than ideal or who can't afford to make a down payment on a conventional loan. Federal guidelines allow lenders issuing FHA loans to consider "nontraditional credit histories," including candidates with no credit score. Try to find several FHA lenders so you can compare rates and borrowing terms—since the FHA gives lenders some leeway in their pricing and fees, some may offer you a better deal than others.
General requirements for an FHA loan include:
- A down payment of at least 3.5% of the home's market value
- DTI ratio (that is, the mortgage payment as a percentage of gross monthly income) no greater than 31%
- Paying mortgage insurance for the full duration of the loan (or for 11 years if you make a down payment of 10% or more)
- Enough cash in the bank at closing to make at least one monthly mortgage payment
While FHA loans may be more accessible than conventional loans, they are considerably more expensive over their lifetime than conventional loans in similar amounts. A conventional mortgage could save you tens of thousands of dollars over a comparable FHA loan.
How to Build Your Credit Score for a Mortgage
While it's possible to get a mortgage without a credit score, the process is typically faster when you have a credit score, and even a fair to good credit score will likely mean you have more lending options to choose from than trying to apply with no credit at all.
If you've never had a loan or credit card, you can establish a credit score within about six months. It likely won't be great, but it'll get you a start.
If you've gone "credit invisible" because you simply haven't used credit in a couple of years, you can re-establish a credit score in three or four months simply by activating a credit card by making a purchase. It can be a small purchase, and if you can pay it off immediately (avoiding interest charges), that'll be enough to regenerate your credit file.
Once you've established (or revived) your credit report, you can build up your score by making regular purchases and payments in any amount. As long as the payments are made on time each month, they'll add to your positive payment history and will tend to increase your credit scores. As little as six months of positive payment history can lift your credit score.
Get Credit While You're Establishing Credit
If you have a history of making utility and cellphone payments on time, the free Experian Boost®ø service will give you credit for your on-time payments. Experian Boost can help you improve your credit score or add to your credit file to help you establish credit more quickly.
Getting a mortgage will generate credit reports for you at all three national credit bureaus (Experian, TransUnion and Equifax), but establishing credit before you apply for your mortgage could make shopping for the loan—and a home—faster and easier.