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Can You Buy a House With No Credit History?

tl;dr

What You Need To Know

  • Yes! You can buy a house with no credit history, but you’ll need to prove your creditworthiness in other ways
  • Instead of traditional credit, you’ll need to show a history of on-time payments for your bills – like rent, utilities or tuition
  • A government-backed mortgage can be a good option for no-credit home buyers with lower incomes

Contents

So, you’re thinking of buying a house. 

Maybe you’ve been renting – and you’re sooo over it. Or you’ve been living in your childhood bedroom and feel like you’ve outgrown your band posters and middle school trophies. Or you’ve decided that it’s time to invest your hard-earned cash in something that will grow in value. And, bonus: You get to live inside your investment!

Whatever’s going on, you’d like to vacate your current crib and own your own home. 

But … you’ve got no credit. Nope, we’re not talking bad credit. We’re talking no credit history at all. 

Can you buy a house without a credit history? In a word: yes!

It’ll take more legwork, and the process will probably take longer. It could also be pricier because you may end up with a higher mortgage interest rate, a higher monthly mortgage payment or end up paying mortgage insurance

Sure, there are “costs” to buying a house with no credit history, but it can be done – and we’ll show you how.

Let’s look at what credit is, what it means to have no credit history and how you can buy your dream home without it. 

What Is Credit?

Credit is the power to borrow money and pay it back. Credit typically refers to your credit history, which is a record of how you spend and borrow money. 

Your credit history is a compilation of data. It’s the number of loans and credit cards you’ve taken out and any debt you owe. It reports whether you pay your loan bills on time and if you’ve missed payments. 

Your credit history plays a large role in calculating your credit score. Your credit score is a three-digit number from 300 – 850 that helps lenders determine whether you qualify for a loan, how much money they’ll lend you and at what interest rate. 

The higher your credit score, the more creditworthy you are. 

Because your credit score is heavily based on your credit history, if you don’t have a credit history, you won’t have a credit score.

What Does It Mean To Have No Credit History?

Having no credit history is not the same thing as having bad credit. Not even close! It’s like having a notebook with blank, empty pages. 

The pages are empty because you haven’t had any credit activity in your name, like a car loan, student loan or credit card account. Or maybe you were never made an authorized user on someone else’s credit card account.

The Consumer Financial Protection Bureau (CFPB) refers to people without a credit history as “credit invisible.” According to the CFPB, around 26 million American adults are credit invisible. The people who are most likely to have no credit history tend to be[1]:

  • Younger: Over 80% of 18- and 19-year-olds are credit invisible compared to under 40% of people in their 20s.
  • Older: Credit invisibility increases after the age of 60.
  • Members of underserved communities: In lower-income neighborhoods across the United States, almost 30% of adults are credit invisible. 

Getting a Conventional Mortgage With No Credit 

Not having a credit history or credit score makes it harder for mortgage lenders to evaluate you as a potential borrower – but it’s not impossible. Credit history or not, lenders need to gauge and verify your ability to repay a loan.

To do this, lenders use nontraditional credit data in place of traditional credit data. Rather than reviewing credit card(s) or loan payments, they review your payment history for things like rent, utilities or tuition. Lenders want to see if you consistently make your payments on time and in full. 

They need this information because they need to verify that you’ll be able to make your mortgage payment each month. 

What lenders learn from your nontraditional payment history indicates how reliable you are with money and how reliable you’ll probably be when it comes to repaying their money. 

What Are Some Examples of Nontraditional Credit?

A prospective borrower will need to provide 2 – 4 types of nontraditional credit that were paid consistently over 12 consecutive months.[2] Some examples of nontraditional credit are:

  • Rent payments or verification of rent (VOR) 
  • Car, health or renters insurance payments
  • Medical bill payments
  • College tuition payments
  • Water, electric, gas or other utility payments
  • Cellphone payments

Without a credit score, you’ll want to aim for a debt-to-income (DTI) ratio of 36%.[2] Your DTI is a measure of how much you owe and how much you earn. Lenders use it to make sure you don’t take out a loan that could become unaffordable.

Home Possible® and HomeReady Mortgages®

Fannie Mae and Freddie Mac offer special mortgages to low-income and first-time home buyers.

Fannie Mae’s HomeReady® mortgage is targeted at lower-income home buyers with good credit. If the buyer has no credit, they can still get a HomeReady® loan if they can provide at least 3 nontraditional credit sources. One of the credit sources must be housing-related. If no housing-related credit source is available, you’ll have to save up to 12 months’ worth of mortgage payments to qualify for the loan.[3]

You’ll also need[4]:

  • Income under 80% of your region’s median income
  • A maximum debt-to-income (DTI) ratio of 45%
  • A loan-to-value (LTV) ratio no higher than 90% (Some lenders may allow up to 97%.)

Freddie Mac’s Home Possible® home loan is very similar to the HomeReady® home loan. And borrowers without a credit history are eligible for this mortgage, too. Borrowers are required to have:

  • At least 2 nontraditional credit sources (one must be housing-related)[5]
  • Income under 80% of your region’s median income[6]
  • A maximum DTI of 45%[7]
  • An LTV no higher than 95%[8]

And there’s more. Both Fannie Mae and Freddie Mac require that borrowers with no credit history attend a homeownership course before closing on their HomeReady® or Home Possible® mortgages. 

Fannie Mae offers the Framework home buyer course. Freddie Mac offers Homebuyer U through its CreditSmart® suite of financial and homeownership courses. 

Homeownership and home buyer courses are worth your time. You learn all sorts of useful information like how big of a loan you can afford, how to pick the right loan for you, what to put in your purchase offer and how to avoid common closing pitfalls. 

After you’ve completed the homeownership course, you’ll get a certificate of completion that gets saved in your mortgage file.

Government-Backed Mortgages

The U.S. government backs several types of mortgages. 

Federal Housing Administration (FHA) Mortgages

Borrowers with credit scores below 620 have FHA loans in their corner. The requirements for an FHA loan are more relaxed than the requirements for most conventional mortgages. And they’re also available to home buyers with no credit history.

Aspiring homeowners can apply for an FHA mortgage loan through traditional mortgage lenders. FHA loans are geared toward first-time home buyers, lower-income borrowers and borrowers with lower credit scores or past credit or savings issues.

The interest rates on an FHA loan tend to be higher. And you’ll have to pay mortgage insurance, which will add to the cost of your monthly mortgage payment. 

To apply, you’ll need to provide 3 nontraditional credit sources, including at least one that outlines your rental or utility payments.[9]

You’ll also need[10]:

  • At least a 3.5% down payment
  • A DTI that’s lower than 31% (in most circumstances) or 43% when other criteria are met
  • 2 years of steady employment income

Department of Veterans Affairs (VA) Mortgages 

Are you an active or retired member of the U.S. armed forces or a surviving spouse? Look at the loans that might be available to you through the VA loan program

You can get a mortgage with no down payment or mortgage insurance requirement. The interest rates for VA loans tend to be lower as well. You’ll have to pay a one-time funding fee that will total around 1.4% – 3.6% of your loan amount.[11]

Borrowers must apply to the VA for a certificate of eligibility (COE). The certificate confirms for your lender that you’re eligible for a VA loan. 

There aren’t many VA requirements for these loans, but your lender may have its own requirements. 

U.S. Department of Agriculture (USDA) Mortgages

If you live in a rural area or want to move to the countryside, you may be able to qualify for a USDA loan. To get one without a credit history, you’ll need:

  • A year’s worth of payment history from 3 alternative credit sources (like rent payments, utility payments or insurance)[12]
  • Income below 115% of the home area’s median income[13]
  • DTI of 41% or lower[13]

Other Ways To Get a Mortgage Without a Credit History

There are other ways to boost your chances of qualifying for a mortgage.

Having a high down payment

Having a healthy wad of cash to put down on your home can help secure that mortgage. And the bigger the wad, the smaller the mortgage. You’ll borrow less money, which will shrink your monthly mortgage payment and might even help you qualify for a lower mortgage rate.  

Bottom line: a mortgage lender will look favorably on a big down payment. It’s a signal to the lender that you are totally invested in buying the home.  

Getting a co-signer

Got a relative with good credit who’d be willing to co-sign a mortgage? If that’s a yes, you’ve hit the jackpot! But, before anyone signs anything, make sure your co-signer knows that they’ll be legally obligated to pay back the loan if you can’t. 

Rather than risk future invites to Thanksgiving dinners, make sure you and your co-signer are well aware of the risks and responsibilities of co-signing. If you miss a payment, they’ll be on the hook to pay it and it can affect their credit.

Go Forth and Mortgage

You’ll need expert guidance on which loan is right for you and how much debt you can handle. For that, look for a reputable lender who’ll keep your best interest in mind. 

Community banks, your local credit union and online lenders tend to be good sources for no-credit mortgages. 

Before you grab that mortgage application, do your homework and start collecting your nontraditional credit sources. Soon enough, you may find yourself lounging inside your new, middle-school-trophy-free investment.

  1. Consumer Financial Protection Bureau. “Data Point: Credit Invisibles.” Retrieved November 2021 from https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf

  2. Fannie Mae. “Selling Guide.” Retrieved November 2021 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-4-Nontraditional-Credit-History/1032996871/B3-5-4-01-Eligibility-Requirements-for-Loans-with-Nontraditional-Credit-12-19-2017.htm

  3. Fannie Mae. “HomeReady FAQs.” Retrieved November 2021 from https://singlefamily.fanniemae.com/media/8316/display

  4. Fannie Mae. “Eligibility Matrix.” Retrieved November 2021 from https://singlefamily.fanniemae.com/media/20786/display

  5. Freddie Mac. “Mortgages For Borrowers Without Credit Scores.” Retrieved November 2021 from https://sf.freddiemac.com/content/_assets/resources/pdf/requirements/mtges4borr_nocreditscores.pdf

  6. Freddie Mac. “Home Possible®.” Retrieved November 2021 from https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/home-possible

  7. Federal Deposit Insurance Corporation. “Home Possible®.” Retrieved November 2021 from https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-1-docs/freddie-home-possible.pdf

  8. Freddie Mac. “Home Possible® Fact Sheet – Origination and Underwriting Requirements.” Retrieved November 2021 from https://sf.freddiemac.com/content/_assets/resources/pdf/fact-sheet/home_possible_factsheet.pdf

  9. U.S. Department of Housing and Urban Development. “Non-traditional Mortgage Credit Report (NTMCR) Requirements.” Retrieved November 2021 from https://www.hud.gov/sites/documents/4155-1_1_SECC.PDF

  10. Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved November 2021 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf

  11. U.S. Department of Veterans Affairs. “VA Home Loan Guaranty Buyer’s Guide.” Retrieved November 2021 from https://www.benefits.va.gov/HOMELOANS/documents/docs/VA_Buyers_Guide.pdf

  12. U.S. Department of Agriculture. “Direct Loan Program’s Credit Requirements.” Retrieved November 2021 from https://www.rd.usda.gov/files/RD-SFH-CreditRequirements.pdf

  13. USDA Rural Development. “Single Family Home Loan Guarantees.” Retrieved November 2021 from https://www.rd.usda.gov/sites/default/files/fact-sheet/508_RD_FS_RHS_SFHGLP.pdf

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In Case You Missed It

Take-aways

  1. If you’ve never taken out a loan or owned a credit card, you won’t have a credit history
  2. The FHA, USDA and VA all offer government-backed mortgages to qualified home buyers with no credit
  3. To get a Freddie Mac Home Possible® or Fannie Mae HomeReady® mortgage loan without credit, you’ll need to complete a mortgage education program

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