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.
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.
Here’s how to get a home loan with no credit:
- Ask your landlord or service provider to report on-time housing and utility payments to one of the three main credit reporting agencies.
- Get a loan backed by the Federal Housing Administration.
- Consider a smaller lender or a credit union.
No credit history? A payment history can help
Even if you have no credit history from a mortgage lender’s point of view, your payment history is out there; it’s just a little harder to locate, making it more difficult for a computer to generate a credit score.
For example, Experian, one of the three major credit-reporting agencies, accepts rental payment history information from third-party processors as proof of credit history, but it’s up to your landlord to opt in to the system, says Rod Griffin, Experian’s director of public education.
Although some larger multifamily apartment complexes are already reporting this information automatically, private landlords of single units or a handful of properties might not realize they can do their tenants this service, Griffin adds. There’s a nominal monthly fee for landlords to collect and report their tenants’ payments online via third-party processors such as PayYourRent, ClearNow and RentTrack.
Don’t forget that student loans get factored into your credit score, Griffin says. Making timely payments for at least six months or more will help build a positive credit score. Utility payments and cell phone bills are also considered, but fewer of those companies are jumping on the reporting bandwagon because of privacy laws in some states.
These type of payments establish a track record that FICO and VantageScore have included in their credit scoring formulas, Griffin says. The idea that you need credit cards or other personal loans to qualify for a home loan simply isn’t true anymore, he 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. On the flip side, late rent or lease payments and negative civil judgments can also be reported and will work against you, he cautions.
Consider a government loan
One way to buy a home if you don’t have a traditional credit history is to consider a loan backed by the Federal Housing Administration. Guidelines from the U.S. Department of Housing and Urban Development for FHA loans address how nontraditional credit histories can be used to qualify for a mortgage. 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 43% 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 the best mortgage lenders will open their mortgage 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
Luckily, 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.
This article was updated. It was originally published Dec. 31, 2014.