When you apply for a mortgage, lenders typically look closely at a few key things: Proof of income and ability to make payments, debt-to-income ratio, and credit score. As a result, borrowers with no credit history or low credit scores may struggle to receive mortgage approval.
In this post, we’ll discuss options for buyers with no credit to receive a mortgage and buy a home.
Is It Possible to Buy a House With No Credit?
Yes, it is possible to buy a house with no credit, though it’s typically more difficult to get approval for a mortgage. Borrowers with no credit are more likely to have less desirable loan terms, which may require higher interest rates.
There are two primary options: You can leverage loan types that offer manual underwriting for non-traditional credit histories, or get a co-signer with a strong credit history for your loan.
Alternatives to Traditional Credit for Homebuyers
While many lenders want to see strong credit scores when you’re applying for conventional mortgages, you can leverage alternatives to traditional credit to obtain certain types of financing.
1. Use Alternative Credit Data
Traditional credit is built by making regular, on-time payments on debt, including student loan debt, credit cards and car loans. If you’ve never had a credit card or a loan history, you won’t have any credit.
You can use alternative data that shows a history of on-time payments and financially responsible behavior, including:
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Rent payment history
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Utility bill payments
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Ongoing payments for services like cell phone or internet service
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Bank statements
Some lenders will offer manual underwriting processes to review this alternative credit data.
2. Get a Co-Signer
Co-signers agree to take on financial responsibility of the loan in the event that you as the primary borrower become unable to make payments. Parents, family members and friends most commonly act as co-signers.
Co-signers with strong credit can help you get approved for loans that you wouldn’t have received without their help. There is risk involved for co-signers, however, as they are responsible for the loan but don’t appear on the title. And, if you fail to make payments, it can fall onto them. As a result, it may be difficult to find a co-signer for a substantial loan like a mortgage.
3. Apply for a Subprime Mortgage
Subprime mortgages carry higher interest rates than “prime” mortgages. This high interest rate is meant to compensate the lender for the perceived higher risk of lending to borrowers with low credits.
It’s important to consider your interest rate’s impact on your monthly payment.
Let’s look at an example of a 30-year mortgage with different interest rates. Purchasing a $300,000 home with a 20% down payment will have a $1,438.92 monthly payment at a 6% interest rate, but a $1,761.03 payment at an 8% interest rate.
Over the lifetime of your loan, you’d pay a total of $278,011.65 in interest for the 6% loan and $383,972.59 for the 8% loan.
While subprime mortgages may help you get approved for a mortgage, paying the loan on time can help you establish your credit history. You may be able to refinance down the road for a better interest rate, though there’s always the risk that prime interest rates will increase over time, too.
Government Programs That Can Help
Conventional mortgages may be difficult to obtain if you have no traditional credit history or a low credit score, but there are several types of government-sponsored loans that may help you purchase a home.
FHA Loans
FHA loans can be a good option for borrowers with low credit or limited credit history. FHA loans are often more lenient than conventional mortgages, and offers manual underwriting options. This can make it easier to be approved for a loan.
FHA loans may also have more flexible debt-to-income (DTI) requirements and more competitive interest rates than competitive mortgages.
If you don’t have a strong credit score, you’ll need to:
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Go through the manual underwriting process.
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Have a higher down payment, often of at least 10% for borrowers with credit scores under 580.
VA Loans
Veterans, military members and eligible surviving spouses can use VA loans to purchase a home. VA loans by definition don’t have a minimum credit score, though some private lenders offering the loans may.
VA loans may offer more competitive interest rates, and allow borrowers to purchase a home without a down payment and for competitive interest rates. Many lenders look at past history of payments towards rent, utilities, car insurance, and more to assess credit worthiness.
USDA Loans
Low-income or moderate-income buyers in rural areas may be eligible for USDA loans. These loans have no-credit options for buyers that require manual underwriting to assess the willingness and ability to make the loan’s payments.
USDA loans don’t require any down payment, and offer competitive interest rates.
How to Improve Your Chances of Buying a Home Without Credit
To improve your chances of buying a home without a credit history, you should:
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Save for a larger downpayment, as it can reduce the amount you need to borrow and show financial responsibility.
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Provide a detailed explanation of your financial history and come with extensive documentation.
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Work with a lender willing to consider non-traditional factors and consider government-backed programs.
The Pros and Cons of Buying a House with No Credit
There are pros and cons you may experience when buying a house with no credit history, and it’s important to weigh them carefully.
Pros
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Become a homeowner now: You can stop waiting to become a homeowner, and start building equity in your home now.
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Potential low interest rates with government programs: USDA, FHA and VA loan programs may offer competitive interest rates even for borrowers with no credit.
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Secure your place in the housing market: The housing market can be unpredictable, and securing a home now before house prices potentially increase may be best for your financial situation.
Cons
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Limited lender options: Fewer lenders are willing to provide manual underwriting or work with borrowers with low credit, which can be frustrating.
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Longer preapproval and approval processes: Manual underwriting processes take longer than traditional underwriting, so it may take much longer to receive preapproval or close on your loan.
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Higher interest rates and fees: Subprime mortgages can result in higher interest rates, which can be significantly more expensive over the lifetime of the loan. They may also have less desirable loan terms.
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More difficulty getting offers accepted: FHA and VA loans are known for having particularly stringent appraisal processes that can impact a home purchase deal. As a result, some sellers may show preference to borrowers with conventional mortgages.
The Bottom Line
When purchasing a home with no credit, there are a few things to keep in mind:
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Preapproval processes may take longer, especially considering conventional approval may take just a few quick hours.
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Loan closing can take longer than closing with traditional mortgages, taking closer to 60 days instead of 30-40.
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There will likely be a much more review of your financial history, so you should have thorough documentation prepared upfront.
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You’ll receive a higher scrutiny when it comes to your ability to repay the loan.
Frequently Asked Questions
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Can you buy a house with no credit if you’re a first-time homebuyer?
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Buying a house with no credit or low credit as a first-time homebuyer is particularly challenging. If you can’t pay for the home in cash and need a mortgage, however, there are options available. You may be able to take advantage of lenders offering manual underwriting processes or loans sponsored by government programs. Keep in mind, however, that your interest rate will likely be higher than borrowers with better credit.
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What types of loans are available for people with no credit?
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People with limited credit may be able to obtain a mortgage with an FHA loan, VA loans or USDA loans that offer manual underwriting.
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How long does it take to get approved for a mortgage with no credit?
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Manual underwriting processes can take longer than standard mortgage underwriting, though you can still expect loans to close within a reasonable time frame. USDA loans with manual underwriting, for example, can be expected to close in 60 days.
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If you need to improve your credit for loan approval, the timeline may vary depending on your situation. If you have no credit history, a year to two years of on-time payments and low debt utilization can be a significant impact on your credit score. In some cases, even a few months of dedicated effort can improve a lower credit score.
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This article originally appeared on GOBankingRates.com: Can You Buy a House with No Credit? Explore Your Options