When you apply for a mortgage, one of the things a lender will check is your credit score. The higher it is, the more likely you are to qualify for a mortgage.
But what if you don’t have a credit score or history? Should you forget about buying a home?
Not so fast. Although buying a house without credit can be tricky, it’s by no means impossible. Here’s how to buy a house without credit.
Why Credit Is Important When Getting a Mortgage
Any time you apply to borrow money, lenders look at your credit history as an indicator of whether you’re likely to pay them back. Your credit history consists of two main components:
- Your credit report is a statement of your borrowing history. It lists current and past credit accounts, payment history and balances.
- Your credit score is a three-digit number that represents your creditworthiness. Credit scores can range from 300 – 850, and the higher the number is, the better.
When you apply for a mortgage, lenders will pull your credit report and look at your credit score to decide whether to give you a loan. Lenders check your credit report for red flags like missed payments or delinquent debts that could indicate you can’t be completely trusted with a home loan.
They also look at your credit score to see how risky you are as a borrower. A higher credit score means you’re generally considered less of a risk. Lenders tend to reward that with not just approval to take out a loan, but also better interest rates.
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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 lenders consider when deciding if they’ll approve you for a mortgage. While the exact credit score needed to buy a house will depend on your lender, here are some general numbers:
- Conventional mortgage: 620 or better
- FHA loan with 3.5% down: 580 or better
- FHA loan with 10% down: 500 or better
- VA loan: Many lenders require 580 or better.
- USDA loan: Many lenders require 640 or better.
It’s harder for lenders to give a mortgage to borrowers who don’t have a credit history or score since there’s a lot of money at stake. But while lenders prefer to see a credit history and minimum credit score, first-time home buyers with no credit can still qualify for certain types of home loans.
There’s also a difference between poor credit and no credit when applying for a mortgage. Poor credit means you have an actual history of mismanaging debt. No credit simply means that you haven’t borrowed before. A poor credit score generally falls into the 300 – 579 range.
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How To Buy A House Without Credit
You may be wondering how to buy a house with no credit. Here are some potential options.
Apply For An FHA Loan
An FHA loan is a mortgage backed by the Federal Housing Administration. FHA loans require a debt-to-income ratio of 57% or less, but many lenders prefer a ratio that’s closer to 40%.
According to 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, FHA lenders can’t use lack of a credit history as a reason to reject a loan application.
Keep in mind that FHA loans generally require two types of mortgage insurance payments. You’ll have to pay an upfront mortgage insurance premium of 1.75% as well as an annual premium between 0.15% and 0.75% of your loan balance, broken into monthly payments.
Get A Co-Signer
A co-signer is someone who agrees to sign your mortgage with you and assume responsibility for the loan. This doesn’t mean the co-signer will be the one making the loan payments, but it means they agree to make the payments if you, the primary borrower, do not.
Your mortgage co-signer should have a good credit score and a strong credit history. Co-signing a mortgage is a major responsibility that carries significant risk, so it may be tough to find someone willing to do that for you.
Go Through The Underwriting Process
Underwriting is the process where a mortgage lender verifies your income and employment, debt and financial history. Someone without a credit history or score may be able to go through what’s known as manual underwriting. With manual underwriting, a human reviews your financial documents 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 payments from your landlord, insurance company, utility companies and others you’ve done business with to show your lender that you pay your bills on time every month.
Use A Smaller Lender
Nontraditional lenders, such as small or online banks and credit unions, often have more lenient lending standards than big banks, so you may have an easier time getting a mortgage with no credit. If you already have an account at a small bank or credit union, talk to a loan officer to see what options you have. If you don’t have an existing account, shop around for lenders and review their requirements.
Make A Large Down Payment
Mortgage lenders may be more inclined to overlook a nonexistent credit history if you’re able to make a large down payment. You may need a down payment of at least 20% in this case, and the more money you put down, the less risk your lender takes on. Plus, being able to make a large down payment shows your lender that you’re on solid financial footing.
Pay In Cash
Most people don’t have a few hundred thousand dollars sitting around to buy a home with. But you might have received a large gift or inheritance you can put toward a home. Or you might be a very diligent saver who’s been putting money into the bank for years with the goal of buying a home outright. That’s an easy way to buy a house without credit.
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Other Home Loans For First-Time Home Buyers With No Credit
An FHA loan isn’t the only borrowing option to buy a house without credit. Here are some other loan options to look at when you don’t have a credit history or score.
Conventional Loans
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 mortgages as long as borrowers meet these requirements:
- Down payment: For a conventional loan, borrowers typically need a down payment of at least 3%. This amount may be higher if you don’t have a credit score.
- Reserve requirements: Borrowers must have 12 months’ worth of mortgage payments in the bank when they close on their home.
- DTI: Without a credit score, borrowers must have a debt-to-income ratio (DTI) of no more than 36%.
- PMI: With a conventional mortgage, the amount of private mortgage insurance (PMI) you’ll pay usually depends on your credit score. Without a credit score, your PMI may be higher.
VA Loans
A VA loan is backed by the Department of Veterans Affairs and designed specifically for qualified military veterans, active-duty service members, Army Reserve and National Guard members, and surviving spouses. While many lenders require a minimum credit score of 580 for VA loans, the VA doesn’t set a minimum score.
The VA does require lenders to review a borrower’s entire loan profile, which includes verifying payment history in ways other than reviewing credit history.
USDA Loans
USDA loans are backed by the U.S. Department of Agriculture and are designed for 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 borrowers can sometimes find ways around that. Using the manual underwriting process, you may qualify for a USDA loan with no credit score if you can provide at least 12 months of payment history in another way.
The Bottom Line: How To Buy A House With No Credit
Having great credit and a solid credit history makes it easier to qualify for a mortgage. But now that you know how to buy a house without credit, you can look at different options to achieve your dream of becoming a homeowner.
That said, having a credit score could be helpful to you in other ways, so it could pay to try to build credit slowly but surely. Getting a secured credit card or becoming an authorized user on someone’s credit card could help you establish a credit history and qualify to borrow money more easily in the future.
Maurie Backman
Maurie Backman has more than a decade of experience covering personal finance topics that include mortgages, loans, retirement, Social Security, and investing. Prior to becoming a full-time writer, she worked in the financial industry as well as in product design and marketing. Maurie holds a bachelor's degree from Binghamton University, where she studied creative writing and finance. She was happy to combine her two areas of study into a career that allows her to educate consumers on a host of financial topics.
