Many people would love to buy a home but think they cannot because they haven’t established any credit. But can you buy a house with no credit? The answer may surprise you!
A popular misconception is that a person needs a credit score to buy a house. While it’s true that a good credit score will help one get the best interest rate, having no credit will not preclude someone from being able to buy a home. There are no-credit-check loans if one has other types of alternative credit.
The Federal Housing Administration (FHA) will grant loans without credit by using a nontraditional credit report and manual underwriting to determine eligibility. Instead of looking at the usual loan and credit card histories, FHA can look at a history of payments for rent, utility bills, insurance, cellphone payments, school tuition and internet services. Assuming a person has a satisfactory history of paying these on time and in full, they can be used instead of traditional credit reports.
In FHA’s view, having no credit is better than having bad credit. Bad credit means a FICO score below 580 or occurs when a person has late or missed payments, high credit utilization, bankruptcy, too many hard credit checks and charge-offs.
Bad credit can cost a person thousands more over the life of a loan. Bad credit home loans are doable, but the mortgage interest rate could be higher, a larger down payment might be required and mortgage insurance premiums (MIP) are often higher because a person with bad credit is at an increased risk of defaulting on the loan. Buying a house with bad credit is not easy, but it’s possible.
Apply For an FHA Loan
If you’ve never had a credit card or loan, you can still apply for an FHA loan to purchase a home. The FHA loan has one big advantage – you only need a 3.5% down payment on the home's purchase price. On a $300,000 home purchase, the down payment would be $10,500. The initial loan amount would be $289,500.
While the best home loan rates are usually on conventional mortgages, prospective homebuyers can still get a home loan through FHA with low mortgage rates. Most people choose a fixed-rate mortgage to have a predictable and stable payment throughout the life of the loan, but Adjustable-Rate Mortgages (ARMs) are also available. If you are self-employed, specialized mortgage lenders can help you.
Get A Co-Signer
If you don’t have enough alternative credit, it’s also possible for a Co-signer to apply for the FHA loan with you. This can enhance the chance of getting loan approval because the underwriter can use the co-signer’s income to help with approval and may even lower the interest rate if the co-signer has an excellent credit history. The increased income could help to lower your debt-to-income ratio as well. Before applying for the FHA loan, ensure the co-signer’s credit history is good.
Having a co-signer can offer you financial security because it reduces the likelihood of missing a payment should the borrower suffer a financial loss, such as a job layoff. Unlike a Co-borrower (e.g., husband and wife), a co-signer (e.g., parent) does not have an interest in the property, even though they still must repay the loan if the borrower cannot.
Go Through The Underwriting Process
When an FHA loan is reviewed, that’s called the underwriting process. The underwriter reviews the borrower’s complete financial information to assess if the person qualifies for a loan and the lender’s risk of the borrower defaulting.
The underwriter also must ensure that the loan package adheres to FHA guidelines. Once the review is completed and the borrower approves the loan, the loan is delivered to the closing agent, who will handle the closing.
The borrower needs to be in regular contact with the lender and respond to requests for financial documents in a timely fashion. Proof of employment, assets and rent payments are often requested, so it’s best to get that paperwork in order at the beginning of the underwriting process.
Choose A Smaller Lender
There are three main advantages to choosing a smaller lender to perform the FHA loan:
- More frequent and closer contact, making the experience more personal
- More competitive mortgage rates because small lenders can negotiate
- Small lenders may offer lower credit requirements and more exceptions to the underwriting process.
A good small lender will also explain the upfront costs of buying a house and the ongoing costs such as taxes, insurance and maintenance.
Other Mortgage Options for No Credit or Low Credit
There are other options for those with no credit or low credit. One option is to provide a much larger down payment than the minimum 3.5%. If the borrower can put down a larger down payment, the lender takes on much less risk because if the borrower should default, there is substantial equity in the home. Although this is a viable option, very few borrowers with no credit or low credit scores have the funds available to do this. People with substantial savings are more likely to pay their bills when due.
Another option is to find a home for sale with a private owner willing to hold a mortgage. This usually occurs when a seller has no mortgage and is looking for a steady income stream. One advantage of buying a home with seller financing is the seller may be more apt to consider no-credit loans or no-credit-check loans. Another advantage is a faster closing without the usual underwriting process and approval. An appraisal is also not required, but it would be smart for the borrower to have an appraisal and a home inspection performed to ensure that the home is worth the contract price and that there won’t be expensive repairs necessary down the road.
The disadvantages of the owner financing arrangement are the seller may be looking for a larger down payment and the interest rate is likely higher than the typical FHA loan from a lender. In these cases, the seller acts like a lender and sometimes keeps the property title until the buyer pays off the home.
There aren’t many of these deals, sometimes called owner financing or seller financing, but one can sometimes find them advertised on the internet or by joining real estate groups where investors can be found. The borrower must read the contract terms carefully, as the owner may put in the contract that a balloon payment is due after only five or ten years. A balloon payment requires the borrower to pay off the remaining mortgage balance. In such a case, the borrower has to find a lender to approve another mortgage to pay off the owner’s financing.
If a lender advertises “guaranteed” mortgage approval with no credit check, the borrower should be careful with these. In many cases, the lender is offering “non-qualified” mortgages (non-QM). These loans do not have to follow the Consumer Financial Protection Bureau (CFPB) rules, so they may have higher interest rates and greater fees than qualified loans. A few mortgage companies that specialize in bad credit home loans are Angel Oak Mortgage Solutions and Carrington Mortgage Services.
Can you buy a house with no credit? Absolutely! It’s not always the easiest or least expensive route to buying your first home and you may not be quoted the lowest mortgage rates, but you can still get a decent home loan to get you started building equity in your first home and over time, that beats renting.