How to Buy a House with No Credit
Your credit score is a three-digit number lender use to determine your creditworthiness. Without the right score or no score at all, it could affect a bank’s decision on whether or not to give you a mortgage. If you’re one of those people who don’t have a credit score, you may be wondering how to buy a house with no credit.
Tips for Buying a House with no Credit
When you go to apply for a loan, lenders will pull your FICO score from the three major credit bureaus, which are Equifax, Experian, and TransUnion.
Based on your score and a few other factors like income and outstanding debts, the bank will determine whether or not to extend you credit.
You may have heard of lenders turning people away for a mortgage because of bad debt, but what happens when you have no credit?
Maybe you’ve never taken out credit to make a major purchase or you’re living debt-free thanks to healthy spending habits.
If you’re faced with this situation, you’re not alone.
Plenty of home buyers face this problem every day and are still able to achieve the dream of homeownership, but it may take a little bit of work to get there.
Luckily, there are some tips you can follow to help you buy a home even if you don’t have credit.
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Consider Your Options
To get started, you’ll want to talk to your mortgage broker about the different options available to first-time homebuyers.
Conventional mortgages are great if you have a lot of money you can put towards a down payment.
If you get a conventional mortgage, remember that your monthly payment shouldn’t be any more than 25% of your take-home salary.
In addition to conventional loans, most banks also offer specialty programs for people who may not qualify for their traditional loan programs.
You may be offered a Federal Housing Administration or FHA loan.
FHA mortgages were created to help people with little to no credit to buy a home.
Before you sign on the dotted line, you should be aware of the costs associated with getting an FHA loan.
FHA loans often come with added fees that most loans don’t’ have.
You may even have to pay private mortgage insurance on top of your monthly mortgage payments, which can add up to several thousand dollars of the original purchase price over the long run.
If you’re a veteran, there are several VA home loans available to make purchasing a home easier if you don’t meet the credit requirements of traditional home loans.
Talk with your banker to see which mortgage loan option makes the most sense for you before you get started.
If traditional banks don’t offer the loan options you’re looking for, you may want to consider heading to your local credit union to see what they have available.
If you already bank at a credit union, they may be willing to work with you to come up with a loan that will work for you both.
Prepare Your Documentation
After you’ve discussed your loan options, you’ll need to be prepared to show your bank plenty of documentation.
They’ll want to see your income for the last 12 months to prove you hold a steady job.
They’ll also want to see all your monthly expenses. This may include:
- Rent
- Phone, cable or internet bills
- Insurance payments
- Child support payments
- Utility bills
The more you can prove to your lender that you have a good history of on-time payments, the better your chances of qualifying for a mortgage.
Save for a Down Payment
If you’re having a hard time finding a lender who’s willing to give you a loan because you don’t have a credit score, you can make it easier for yourself by saving up for a down payment.
Most banks recommend homeowners put down between 10%-20% when buying a home.
If you’re trying to buy a house with no credit, it’s smart to save up even more than 20% so lenders see you as less of a risk.
It also shows you’re able to manage your money responsibility and know-how to save.
Build Your Credit to Buy a Home
If you’re not looking to get a mortgage right away, you may want to spend some time building your credit.
This will give you a credit score lenders can use when it’s time for you to apply for a mortgage.
You can build your credit by opening a credit card or taking out a personal loan.
Building credit is more than opening a credit card or loan.
Lenders will want to see that you can make regular, on-time payments for at least a year to show you can handle a mortgage.
If you can build up a good credit score over time, you’ll have an easier time getting a mortgage.
Research Lease-to-Own
There are still other options you may want to consider while you’re building your credit.
Some landlords will offer tenants the option to buy into a land contract or lease-to-own.
With this option, you and your landlord agree on a purchase price for their home, then you pay them back over a period of time until you’ve paid the full purchase price.
This is a great option for people who don’t have credit scores for traditional loans but the money available to put towards a home.
You will want to get your agreement with your landlord in writing so there’s no confusion about the terms and to protect your investment.
SUMMARY
Remember, having no credit score is much different than having bad credit.
If you have no credit score, it likely means you’ve likely avoided making money mistakes like getting too many credit cards, or you haven’t been able to establish credit.
Don’t be too hard on yourself if you don’t have a credit score.
Instead, be proud of yourself because you know how to manage your money.
It’s important to be patient and remember you’ll eventually get your dream home.
With these tips, you should be able to show mortgage lenders you’ll be a responsible borrower and are ready to buy a house with no credit.
