Can You Buy A House With No Credit History?
Mortgage lenders prefer to see a good credit score and lengthy credit history when someone applies for a mortgage. But there are plenty of people who don’t meet those standards. So, you might be asking yourself: Can I buy a house with no credit?
Don’t worry – as you pay your bills on time and prove a steady payment history to a mortgage lender, there are plenty of ways to go about buying a house with no credit. Whether it’s a government-backed loan or through manual underwriting, you still have a chance at getting your mortgage.
What Is Credit?
Credit generally refers to how trustworthy you are as a borrower. Any time someone lends you money (also known as giving credit), it becomes a part of your credit history. Any time you apply for a loan or credit card, lenders look to your credit history as an indicator of whether you’re likely to pay them back.
Your credit history consists of two primary components:
- Your credit report is a statement of your borrowing history. It’s made up of information that credit bureaus receive from lenders. It contains your personal information, current and past credit accounts, payment history and other public records.
- Your credit score is a three-digit number that represents your creditworthiness. Credit scores can range from 300 – 850, and the higher the number, the better. In general, anything above 700 is considered pretty good.
When you apply for a mortgage, prospective lenders will pull your credit report and view your credit score to decide whether to give you a loan. Most lenders require a specific credit score or higher to be eligible for a loan. They’ll check your credit report for any missed payments or delinquent debts that would indicate you can’t be trusted with a home loan.
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Do You Need Credit To Buy A House?
Your credit history and credit score will be among the most important factors that lenders consider when deciding if they’ll give you a mortgage. The minimum credit requirements will vary from lender to lender. But you can expect that each lender will want to see evidence that you can responsibly borrow money. In other words, they’ll want to know that you’ve borrowed money before and paid it off on time.
Lenders will also look at your credit score. While the exact credit score needed to buy a house will depend on your lender, here are some ballpark numbers:
- Conventional mortgage: 620 or better
- FHA loan with 3.5% down: 580 or better (This is the minimum score requirement at Rocket Mortgage®)
- FHA loan with 10% down: 500 or better with participating lenders
- VA loan: 580 or better
It’s important to know that a well-established credit history can increase your chances of better loan terms and lower interest rates. However, while lenders will prefer to see a credit history and a baseline minimum credit score, first-time home buyers with no credit can still qualify for certain types of home loans. Let’s talk about some ways first-time home buyers with no credit history can still accomplish their goal of buying a home.
How To Buy A House With No Credit
You may find yourself in a position of wanting to buy a house but having either a low credit score or none at all. Keep in mind that those are two different situations. Having a bad credit score generally means your credit score is either poor (300 – 579) or fair (580 – 699). When you have no credit, it means you’ve never borrowed money before, and therefore have no credit score at all. Both of these scenarios can make it challenging to buy a house, but there are solutions.
Apply For An FHA Loan
An FHA loan is a mortgage that is backed by the Federal Housing Administration. These loans help people purchase a home when they otherwise might not be able to. The program is often aimed at first-time home buyers, but anyone that meets the requirements can get an FHA loan.
To qualify for an FHA loan, you’ll need:
- 3.5% down and a credit score of at least 580
- 10% down and a credit score of at least 500, with participating lenders
- A debt-to-income ratio of 43% or less
Per the FHA loan regulations, lenders are allowed to consider candidates with no credit history. This situation falls under the FHA’s category of a nontraditional credit history, and lenders can find other ways to verify your on-time payment history. In fact, the federal government specifically prohibits lenders from using the lack of a credit history as a reason to reject a loan application.
Keep in mind that FHA loans generally require two different types of mortgage insurance. You’ll have to pay an upfront mortgage insurance premium of 1.75%, as well as monthly mortgage insurance payments.
Get A Co-signer
A co-signer is another individual who agrees to sign your loan documents with you and assume responsibility for the loan. This doesn’t mean the co-signer will be the one making the loan payments. Instead, it generally means they agree to make the payments if the primary borrower doesn’t.
For someone to qualify as a mortgage co-signer, they’ll need good credit and a positive credit history. Keep in mind that co-signing a mortgage is a huge responsibility, and you may be hard-pressed to find someone to take it on.
Go Through The Underwriting Process
Underwriting is the process that your mortgage lender goes through to verify your income and employment, debt and financial history to decide whether to give you a loan. Under normal circumstances, underwriting includes pulling your credit history to determine your creditworthiness.
Someone without a credit history may be able to go through a manual underwriting process. Manual underwriting is when your lender goes through each financial document by hand rather than using an automated computer process.
Manual underwriting is ideal for someone with no credit because it allows your lender to verify your payment history in other ways. You can request proof of on-time payments from your landlord, insurance company, utility companies and more to show your lender that you pay your bills every month.
Use Smaller Lenders
Nontraditional lenders like small or online banks and credit unions often have more lenient lending standards than big banks. As a result, you may have an easier time getting a mortgage with bad credit or no credit at all.
If you have an existing account at a small bank or credit union, set up an appointment with a loan officer to see what you can work out. If you don’t have an existing account, shop around for online lenders to see their requirements. It might take a few tries to find the right lender, so don’t get discouraged.
Have A Large Down Payment
Mortgage lenders may be more inclined to overlook a poor or nonexistent credit history if you’re willing to make a large down payment. Typically, you’d need a down payment of at least 20%. The more money you put down, the more skin you have in the game. Therefore, your lender might see you as more likely to make your monthly payments, so you don’t lose your investment.
Other Home Loans For First-Time Home Buyers With No Credit
Aside from FHA loans, there are other viable loan options for first-time home buyers applying with no credit history. Let’s take a look at some below.
Most mortgage lenders look to Fannie Mae and Freddie Mac when setting their minimum requirements for conventional loans. Fannie Mae and Freddie Mac allow for no-credit home loans as long as borrowers meet a few additional requirements:
- Down payment: With no credit history, borrowers need a down payment of at least 10%. This number is significantly higher than the 3% required for certain credit scores.
- Reserve requirements: Borrowers must have 12 months’ worth of mortgage payments in the bank when they close on their home.
- DTI ratio: Without a credit score, borrowers must have a debt-to-income ratio (DTI) of no more than 36%.
- PMI: With conventional mortgages, the amount of private mortgage insurance someone pays usually depends on their credit score. Without a credit score, your PMI will be equal to what it would be if you had the lowest allowable credit score.
A VA loan is backed by the Department of Veterans Affairs and designed specifically for military veterans who meet certain service length requirements. While many lenders require a minimum credit score of 580 for these loans, there’s technically no minimum credit score needed. The VA requires lenders to review the entire loan profile, including verifying payment history in ways other than credit history.
A USDA loan is one that is backed by the U.S. Department of Agriculture. These loans are generally available to low-to-moderate income earners who live in a qualifying rural area.
USDA loan lenders generally require a credit score of at least 640, but there are ways around that. Using the manual underwriting process, you can get a USDA loan with no credit score as long as you can provide at least 12 months of payment history in another way.
Bottom Line: Buying A House With No Credit Is Possible
It’s undoubtedly easier to qualify for a mortgage with a good credit score and a lengthy credit history. But if you don’t tick those boxes, don’t get discouraged. There are plenty of ways to buy a house with no credit. Get started on your application today to see which home loans you qualify for with your credit history.