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The first thing most lenders look at when you want to buy a home is your credit history. Most people have traditional lines of credit such as credit cards, auto loans or a current mortgage that form a track record of how they manage debt.
How to get a mortgage with no credit history
But if you have no credit history or what’s sometimes called a nontraditional credit history, which is one with no credit card debt or other kinds of loans, it might be harder to establish a set of credit stats. That could make it tough to find a mortgage lender who will work with you. But don’t give up; it’s not impossible.
No credit history? A payment history can help
Even if you have no formal credit history, you have a history of paying for essentials, like rent and utilities, that can boost your credibility as a borrower and even help your credit score.
Experian, one of the three major credit-reporting agencies, accepts rental payment history as proof of credit history, but your landlord has to opt in to the system, says Rod Griffin, Experian’s director of public education.
Student loan payments are factored into your credit score. Utility payments and cell phone bills are also considered in some states. Late payments and negative civil judgments can work against you.
Rod Griffin, Experian
Paying your rent and utility bills on time shows responsibility and tells a story of how well you’re managing those payments — and how well you might manage other debts.”
These type of payments establish a track record that FICO and VantageScore have included in credit scoring formulas. The idea that you need credit cards or other personal loans to qualify for a home loan simply isn’t true anymore, Griffin says.
“Paying your rent and utility bills on time shows responsibility and tells a story of how well you’re managing those payments — and how well you might manage other debts,” Griffin says.
For the future, it is also a good idea to start building credit in the conventional way.
Check out an FHA mortgage
Borrowers without a strong credit record often use FHA mortgages, backed by the Federal Housing Administration. FHA loans allow lenders to use nontraditional credit histories to qualify borrowers. Successful applicants must be able to show at least one year of:
No delinquency on rental payments
No more than one 30-day delinquency to other creditors, such as utility or car insurance payments
No collection accounts other than medical-related incidents
Also, your debts (including your proposed mortgage payment) must not total more than 50% of your total income, and you must have at least one month’s worth of cash reserves left after settlement of the mortgage costs and down payment.
However, just because you qualify for an FHA loan doesn’t mean all mortgage lenders will open their doors to you. Many financial institutions don’t want the hassle of manually collecting a paper trail — called a “manual underwrite” mortgage loan — to help you get financed. It’s easier for them to work with people who have an established credit history and FICO or VantageScore.
Turn to smaller lenders
Plenty of lenders out there are more flexible about working with people who have nontraditional credit histories. Independent mortgage brokers, some online lenders and smaller banks might give you the one-on-one attention you need to qualify for a loan if you’re using rental or utility payments as proof of creditworthiness.
Credit unions are another option. They can provide you with personal service and more flexible pre-qualification criteria. In 2015, credit unions originated more than 8% of U.S. mortgages, nearly double the amount in 2010, according to the CUNA Mutual Group.
If you can show an on-time payment history, have little debt and have saved enough to cover mortgage costs with some financial wiggle room, you can qualify for a mortgage despite having a credit history that doesn’t walk the conventional line. Speak to a few lenders to find out what options might be available to you.
Now is the perfect time to set yourself up for future success to qualify for a home loan. If you’re currently renting, ask your landlord and service providers to report your payments to a processor that works with the credit reporting agencies. Keep up timely payments and you’ll have a solid credit score when the time is right to buy a home.