How to buy a house with no credit: First-time home buyers

Can you buy a house with no credit?

First-time home buyers can face more challenges than repeat buyers.

For example, first-timers often have a poor credit score. More often, they have no credit history at all, which is known in the industry as “a thin file.” 

Fortunately, a thin file might not stop you from buying a home. 

Multiple loan programs today can accept buyers with no credit score at all, as long as they can afford the upfront cost and monthly mortgage payments.

Verify your home buying eligibility. Start here (Jan 16th, 2022)

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Buying a house with no credit

First-time home buyers have never had a mortgage. They may own their car outright instead of paying down an auto loan. And they may reach for debit cards over credit cards when given the chance.

These three traits put first-time buyers “off the credit grid” and can make qualifying for a mortgage a challenge.

Call it the unintended consequence of debt-free living: With no visible evidence that you’ve managed credit accounts in the past, mortgage lenders will be nervous about your ability to repay a loan in the future. There’s no history for them to go on.

Thankfully, you may not need a traditional credit profile to get mortgage-approved.

The FHA mortgage is available to first-time home buyers with ‘thin credit’ or no credit whatsoever. Most mortgage lenders offer these loans, although you’ll have to shop for a lender with flexible credit policies. 

Conventional mortgages, VA loans, and USDA loans may also be an option. However, the rules for these types of mortgages are a little stricter for borrowers with no credit history. And it may be harder to find a willing lender.

Jon Meyer, The Mortgage Reports loan expert and licensed MLO, notes that “these loans may be harder to obtain right now with Covid still affecting mortgage approvals.”

Eligibility requirements 

You may be able to get around not having a credit score. But lenders still need proof you’ll make good on your loan’s monthly payments. They want to know they’re making a sound investment. 

Just like other borrowers, you’ll need to document your personal finances to show you can afford the mortgage. For example, lenders will want to see: 

  • Steady employment
  • Steady income documented by personal tax returns
  • Savings for the down payment and closing costs 
  • Cash reserves in a bank account in case of emergency 
  • Bank statements showing your assets 

And, in place of a traditional credit report, lenders may consider other financial obligations that typically don’t show up in your credit history.

You might be able to prove you’re a responsible borrower via on-time rent, utility, cell phone, or internet payments, for example. 

A good rent history can help

Rent payments are an especially good indicator of whether you’ll keep up with future mortgage payments.

To verify rental history, the lender will request a ‘VOR’ or verification of rent from your current (and possibly previous) landlord(s). This form shows the rent amount, how long you’ve lived there, and whether you were late on any payments. 

A strong VOR can make a big difference in your lender’s approval decision.But rent history isn’t the only important factor. Be sure to pay your other bills — especially student loans and auto loans — on time and in full, as this could make or break your mortgage application.

Verify your home buying eligibility. Start here (Jan 16th, 2022)

FHA loans don’t require traditional credit

Building credit takes time. If you’re ready to buy a home but you lack a credit score, waiting until you’ve built up a worthwhile credit history could feel slow and frustrating — especially in markets where house prices are rising fast. 

The better, faster solution is to seek out mortgage loans meant for borrowers with little or no credit to their name. The FHA mortgage is one such option.

As the Federal Housing Administration states on its website: “The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application.”

Instead of turning away borrowers who have not had a chance to build a credit history (or who have preferred not to), the FHA instructs loan officers to look at all aspects of a mortgage application.

This is good for first-time home buyers because FHA loans allow for a low down payment of just 3.5%, which can help a household with good income but less-than-optimal savings move from renting into homeownership.

Verify your FHA loan eligibility (Jan 16th, 2022)

Conventional loans with no credit

Unlike the FHA mortgage program, conventional loans are not known for their relaxed credit standards. 

But what many borrowers don’t know is that Fannie Mae and Freddie Mac — the agencies that set the rules for most conventional loans — may be willing to approve borrowers with no credit score. 

However, you’ll have to meet additional requirements. 

For instance, you’ll likely need to make a larger down payment — at least 5% or 10% down. The home you’re buying has to be a single-family property you’ll use as your primary residence. 

And the maximum loan amount is $647,200 — Fannie and Freddie’s higher loan limits in high-cost areas don’t apply. 

In addition, your lender will likely want to see a 12-month history of rent payments. 

These loans need to be ‘manually underwritten.’ Manual underwriting means the borrower can’t be approved by a lender’s computerized underwriting system. 

What this means for you is that not all lenders will do conventional loans with no credit score. You’ll need to shop around for one that does.

Verify your conventional loan eligibility. Start here (Jan 16th, 2022)

VA loans for borrowers with no credit

Veterans, military members, and surviving spouses should check their eligibility for a VA loan — even with no credit score or a thin credit file. 

The Department of Veterans Affairs states, “There is no minimum credit score requirement [for a VA mortgage]. Instead, VA requires a lender to review the entire loan profile.” 

This means you may be able to qualify on the basis of on-time rent, utility, and other payments as opposed to a traditional credit score. Qualifying home buyers can use the VA loan program with 0% down, so it’s a great option for first-time buyers. 

Just note, many VA loan lenders require a minimum score of 580 or 620, despite the VA’s lenient rules. So shop around and ask lenders whether they’ll consider non-traditional credit history.

USDA loans for borrowers with no credit

Zero-down USDA loans are geared toward low- and moderate-income buyers in designated ‘rural areas.’ 

For those who qualify, USDA mortgages are an ultra-affordable path to homeownership. 

The U.S. Department of Agriculture, which backs USDA loans, says borrowers with no credit score can get approved with on-time payments for things like: 

  • Rent 
  • Utilities
  • Insurance 
  • Childcare
  • School tuition 
  • Internet or cell phone services 
  • Car lease 

Like conventional loans, USDA loans with no credit score will need manual underwriting. If one lender denies you for this reason, try again with other lenders until one accepts your application. 

Check your mortgage options. Start here (Jan 16th, 2022)

Which lenders will do loans with no credit?

Mortgage companies get to set their own credit minimums. And many want to see a traditional FICO score and healthy credit report.   

But there are mortgage lenders who will accept loan applications with no credit history. You just might have to look a little harder to find them. 

Local banks, credit unions, and specialized mortgage lenders are often more flexible than big-name banks. So those are a good place to start. 

Or, contact a mortgage broker. These lending professionals work with multiple companies and have access to many different loan products. They’ll know which lenders offer the right programs and are willing to consider applications with no credit history. They can also help you find the best mortgage rates for someone with your creditworthiness.

Where does my credit report come from?

A credit report is a written history of all creditor accounts which belong, or have belonged, to a person in their lifetime.

Credit reports compile information they get from credit bureaus, which are companies to which creditors report borrower payment history on a regular basis.

In the mortgage space, there are three main credit bureaus — Experian, Equifax, and TransUnion. Each bureau collects the data that helps determine your credit score.

Where does my credit score come from? 

Your credit score is a numerical value that sums up the information on your credit reports. 

The higher your credit score, the more likely you are to make payments. That’s why lenders reward borrowers with good credit scores by approving them for larger loan amounts and lower interest rates. 

Your payment history is the single biggest factor in determining your credit score.

This is why first-time home buyers rarely have credit scores that are “excellent.” There’s just not enough history of managing credit and making payments to make that kind of determination.

Don’t try to build credit last-minute

You might be tempted to improve your low credit score by opening new credit cards, or even taking out a loan, before you apply for a mortgage. Do not do this.  

Unless you’re a year or more from buying a home, opening new lines of credit would actually do more harm than good.  

Credit inquiries (applications for new lines of credit) have a negative effect on your credit report. They may only ding your score a few points, but multiple inquiries in the time leading up to your application will give a lender pause. 

In addition, it takes time to build up credit. Until 12 months of payment history exist for each of the new accounts, the effect on a borrower’s credit score is heavily muted.

New credit accounts inflate your debt-to-income ratio

Taking on new debt could limit your loan options in another way, too. The new debt will increase your debt-to-income ratio (DTI). 

DTI measures your total debt payments against your monthly pre-tax income. Mortgage lenders use this number to see how much room is ‘left over’ in your budget for a mortgage. 

The higher your existing debts, the less mortgage you’ll be approved for. So you want to avoid taking on large debts like a car loan or personal loan in the time leading up to your home purchase unless it’s absolutely necessary. 

Of course, if you’re still more than a year out from buying a home, it’s a great idea to start building up credit. The stronger your credit score and report, the better deal you’ll get on your mortgage.

You can see our guide to building good credit for tips and tricks. 

Bad credit score vs. no credit score 

Having a poor credit score is different from having no credit score. It may be better or worse, depending on the reason for your low score. 

Lenders typically want to see a clean credit history, meaning you haven’t had a bankruptcy, foreclosure, multiple late payments, or other negative credit information in recent years.

If you have a lower credit score because you’ve consistently mismanaged debts in the past, a lender will be much less likely to approve you for a mortgage. 

But sometimes credit scores drop for reasons outside our control. 

The death of a spouse or primary wage earner, divorce, large medical debts, and other unexpected events can take a big toll on someone’s finances. 

If your score is low for reasons outside your control, and you’ve been actively working to improve your credit, lenders are going to look at your mortgage application with a friendlier eye. 

Minimum credit score requirements for mortgage loans

Of course, ‘low’ is a relative term. Borrowers who don’t fall in the ‘thin file’ category still have to meet minimum credit score requirements for the loan program they want: 

  • FHA loan minimum: 580
  • VA loan minimum: 580-620
  • Conventional loan minimum: 620
  • USDA loan minimum: 640

An FHA loan is a great option for someone with a FICO score on the lower end. The typical minimum credit score requirement is 580. 

Even borrowers with a FICO score between 500 and 579 could get approved via FHA with a down payment of 10% or more. However, few lenders adhere to the 500 minimum; 580 is much more common. 

VA loans are a good option for lower-credit borrowers with a military service history.

The VA mortgage program technically has no minimum credit score. Although, many lenders enforce a minimum of 580-620 or higher. So if your score is on the bottom end of that spectrum you’ll need to shop around for a lenient mortgage company. 

Do mortgages with no credit cost more?

Compared to a repeat home buyer with 20 years of excellent credit history, borrowers with thin credit files will likely pay more for their mortgage loans.

But this doesn’t mean borrowing should be cost prohibitive. You could still become a homeowner with an affordable monthly payment and start building equity.

The extra borrowing costs come in a couple different forms:

  • Higher interest rates: Borrowers with less credit typically pay a higher interest rate compared to borrowers with a long and stable credit history
  • Mortgage insurance: This special insurance policy protects the lender in case you default on the loan, but the borrower pays the premiums

These two costs play off each other: Paying mortgage insurance lowers your interest rate. 

How long will I pay mortgage insurance?

FHA borrowers pay an upfront mortgage insurance premium that adds 1.75% to their loan amount. Then, most FHA borrowers pay annual premiums of 0.85% for the life of the loan. 

Conventional loans will require private mortgage insurance (PMI) each year unless you put 20% or more down. Or, you can cancel the insurance once you’ve paid off 20% of the loan. 

The good news: Even with FHA, you don’t have to pay these extra costs indefinitely. You could refinance your FHA loan later  — once you’ve built a thicker credit file — and cancel its mortgage insurance.    

Are you eligible for a home loan? 

Don’t let your lack of a credit score discourage you from purchasing a home. There are ways forward. 

Various home loan programs can accept borrowers with no credit score, as long as you prove you’re financially responsible in other ways. This means you wouldn’t need to depend on a co-signer to get approved. 

Understand, though, that lenders get to set their own credit rules. So if one won’t accept your application, you may have to shop elsewhere. Don’t give up! If you’re qualified, another lender may approve you. 

Today’s interest rates are low. If you’ve been thinking about home buying, now could be a great time to get started. Check your eligibility today.

Verify your new rate (Jan 16th, 2022)

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