By Zina Kumok, Financial Health Counselor, Credit Counselor
If you listen to certain financial experts, it’s easy to get the wrong idea about credit. Many money gurus – most notably Dave Ramsey – advise consumers to avoid credit cards and other forms of personal debt.
That might seem responsible enough, until you start shopping for a mortgage with no credit history and have to overcome that barrier.
Thankfully, it’s still possible, though not necessarily easy, for someone without credit to secure a mortgage and buy a house.
Here’s what you need to know.
In this article
What does no credit mean?
In a world of student loans, auto loans and credit cards, it’s hard to imagine not having any debt. But it is possible to live with no credit, especially if you’re young and have avoided loans your whole life.
If you’re debt-free and use debit cards instead of credit cards, it may be possible not to have any recent credit history. You may also have no credit if it’s been years since you had an open credit account.
No credit vs. bad credit
No credit and bad credit are not the same thing.
Bad credit means you have a low credit score, usually because of late payments, high utilization or an account in default. When you have bad credit, it’s a sign that you may be less trustworthy as a borrower.
Having no credit is different.
You can absolutely have a responsible financial record with no credit, and buying a house is still an option – if you play your cards right.
Yet different mortgage lenders have different requirements, many of which exclude people with bad credit or no credit.
Some lenders might approve mortgages for people with poor credit, though they could charge a higher interest rate or offer a subprime mortgage to cover their risk, neither of which is the most cost-effective way to buy a home.
Minimum credit score to buy a home
For fixed rate, conventional mortgage loans, borrowers need a minimum credit score of 620, according to Fannie Mae.
The same minimum credit score applies if you get a mortgage insured or guaranteed by a federal government agency, such as HUD, FHA, VA and RD. We’ll cover more on FHA loans in a minute…
For Adjustable Rate Mortgages (ARMs), the minimum credit score is even higher, coming in at 640.
There are some exceptions to the minimum credit score requirement, like when no borrower has a credit score, and for some manually underwritten mortgages and refinance loans. In these cases, other restrictions and criteria may apply.
Credit can affect your financing
Even if you meet the minimum credit score requirements for a conventional mortgage, your credit score can still affect the types of interest rates and terms you qualify for.
While a difference of 1% might not look like much, over time, an extra percent or two of interest could add up to tens of thousands of dollars.
Learn how bad credit could mean higher borrowing costs HERE.
There’s also a handy calculator to help you see how your credit score could impact your mortage costs HERE.
How to buy a home with no credit
There’s still hope though for people who have bad credit to purchase a home.
Here are some ways a consumer with no credit or poor credit can improve their chances of being approved for a mortgage.
1 – Apply for a FHA Loan
A conventional mortgage is the most common type of mortgage. To qualify for a conventional mortgage, you need a credit score in the 600s or higher, a stable income and a debt-to-income ratio of 43% or less.
People with no credit scores generally won’t qualify for a conventional loan. Instead, they should look at mortgages backed by the Federal Housing Administration (FHA).
The FHA sometimes issues mortgages to consumers with no credit history or low incomes. In lieu of a credit report, the FHA looks at utility payment records, rental payments and car insurance payments.
If you have a history of paying these on-time every month, you may qualify for an FHA loan.
Jessica Garbarino of Every Single Dollar foreclosed on her house in 2012. She spent the next few years paying off credit card debt, building her savings account and instilling good financial habits. When she was ready to buy another house in 2018, she applied for an FHA loan.
Garbarino had avoided using credit since her foreclosure and needed a manual underwriter for her application. They looked at her cell phone, rent and utility payment history to determine her creditworthiness.
Expect to pay a Monthly Insurance Premium
Consumers who use an FHA-backed mortgage have to pay a monthly insurance premium (MIP). This fee ranges from .80% to 1.05% of your mortgage.
Unlike private mortgage insurance (PMI) that comes with conventional loans, MIP doesn’t fall off a mortgage once you’ve reached 22% equity.
MIP stays for the life of the loan, and the only way to remove it is to refinance the FHA loan into a conventional loan. This may be easier than trying to take out a conventional mortgage in the first place, because your FHA mortgage will allow you to build credit as you make payments.
FHA mortgages are popular because they have a lower minimum down payment, 3.5% instead of 5%.
If you don’t have a credit history, you may have to put down closer to 10%.
2 – Find a cosigner
If you’re close to qualifying for a mortgage without a credit report, finding a cosigner might put you over the top.
Read this to learnhow co-signing affects your credit.
A cosigner is someone who takes legal responsibility for your loan if you default or the debt goes into collections. Prospective borrowers most often ask a parent or significant other to act as a cosigner.
Banks often require cosigners if the borrower could pose too high a risk for them to get a loan on their own. A borrower may also use a cosigner if they want a better interest rate or a higher loan amount.
The process for reviewing a cosigner for a loan is similar to the process the primary borrower must go through too.
Here’s what to expect if you use a cosigner:
- Lenders will verify your cosigner’s credit history and check their job status and income.
- After the loan is approved, it will show up on the cosigner’s credit report, as well as your own.
- If you make a late payment or default on the loan, it will affect the cosigner’s credit as well as yours.
3 – Use a small bank or credit union
Sometimes smaller banks and credit unions will be more willing to work with a non-traditional borrower. Being a long-time customer can help you out in this case.
If you have an account at a credit union or local bank, call their mortgage department to ask about your options.
It may take a few tries before you find a willing lender. If you have a history of on-time payments with your insurance and utility companies though, don’t give up hope.
4 – Purchase through an alternative program
If you’re not eligible for a conventional loan, and a FHA loan doesn’t seem like the right fit, there are some other programs to help low-to-moderate income individuals find a path to homeownership.
Habitat for Humanity
Habitat for Humanity is a global nonprofit housing organization that works in local communities across all 50 US states to help people build their own homes (with the help of volunteers) and pay an affordable mortgage.
“Habitat for Humanity is geared for people with really low incomes. They are able to obtain several layers of state and local funding that enable the actual loan to be very small and the monthly payment to be as low as $300,” Suzanne Schwertner, Director of Development for the Housing Authority of the City of Austin says.
This program is limited to people who do not currently:
- Qualify for conventional financing
- Already own real estate
- Have owned real estate within the last three years
However, Schwertner cautions, buying a house through Habitat is a process.
“You attend a number of classes, including credit counseling, before they will allow you to go on to pick a lot. You are required to work hours in their office, resale store and on actual construction sites for homes as ‘sweat equity,’” Schwertner explains.
To qualify for a Habitat home, applicants must be able to:
- Prove a need for housing. Meaning they currently live in poor or inadequately-sized conditions or their rent exceeds 35% of their income.
- Demonstrate an ability to pay. Meaning they have a stable history of income and employment, a good record of paying rent and utilities on time, and enough money to cover closing costs (about $4,000-5,000) and a $600 down payment, among other things.
- Put in “sweat equity.” Each applicant has to complete at least 400 hours of volunteer work towards building Habitat homes. Basically, you get a home, and you give back to help others get a home too.
According to Habitat’s homeownership FAQs page, while they do pull credit history for applicants, there’s no minimum credit score required for approval.
Instead, the Homeowner Selection Committee considers the whole picture of an applicant and looks for applicants who have proven ready to accept the responsibility of homeownership.
Basically, they want to make sure the home will actually be affordable for the applicant.
According to their FAQs:
“We do not expect applicants to have a perfect credit history. We do require applicants with negative credit accounts to have a plan to fix any outstanding collections or past-due items. We are unable to partner with applicants who have active, unpaid judgments or liens. Excessive debts and/or very recent unresolved collections may also disqualify an applicant.”
Bankruptcy plays a role for Habitat decisions too.
While bankruptcy itself doesn’t disqualify an applicant, it must have been discharged at least three years prior to an application for Habitat housing. And applicants must show a good credit history since, though certain requirements may be waived in the case of natural disaster.
“To my knowledge, Habitat reports the monthly mortgage payments to the credit bureau, which helps you continue to build credit. Depending on when you sell the house, there could be equity sharing requirements, which means you would have to split the profit with Habitat or you might have to pay some assistance back,” Schwertner says.
Programs such as the Neighborhood Assistance Corporation of America’s (NACA) homebuying program also service consumers with low incomes who have no credit or bad credit.
These programs look at your finances on a holistic level and can be more forgiving than a traditional lender.
NACA doesn’t require a down payment or charge closing costs or extra fees. Interest rates for NACA mortgages are also often below current mortgage rates.
As of May 2019, the rate for a 30-year fixed loan was 3.75% and 3.25% for a 15-year loan.
If you’re a former or current member of the military, you may qualify for a VA loan with no credit score requirement. These loans also have no minimum down payment and interest rates are below market rate.
These alternative mortgage programs often target low-income borrowers with poor credit or no credit, so they’re used to dealing with people who wouldn’t qualify for a conventional mortgage.
Many of these options are only available for first-time homebuyers. If you’re buying your second house or looking for a new mortgage, you may not be eligible.
5 – Find a good mortgage broker
When you’re applying for a mortgage, tell the broker up-front that you have no credit history. They’ll be able to explain what your options are and might even have suggestions to help you improve your credit.
“We can have our credit agency contact the various vendors to confirm good payment history, and then add the accounts to your credit report at the bureaus in order to establish a credit score,” said mortgage advisor Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
6 – Wait to buy your home until you build better credit
While this is perhaps the least glamorous option, sometimes the best solution for buying a home without any credit is simply to wait and work on building your credit first.
If you take the right steps, it could take just a few short years to get your credit where it needs to be to purchase a home with a conventional mortgage.
Be careful how you build credit when buying a house though. Applying for a credit card is risky if a huge credit limit could entice you to overspend, so consider whether you’re financially responsible enough first.
If not, there are other options available.
To get your credit back on track, read the post “How to Build (or Rebuild) Credit”.
Other ways having no credit affects homebuying
Not having a credit score might not preclude you from getting a mortgage, but it can affect the homebuying process in other ways.
It could impact:
- Your insurance rates
- Your remodeling plans
- And more
When you apply for homeowners insurance, the company may increase your rates if you don’t have a credit score. Insurance companies tend to associate good credit scores with people who make fewer claims.
If your house suffers major damage or you want to remodel your home, you might have to take out a loan to pay for the cost.
Even with a mortgage on your credit report, you might still not have enough credit history to qualify.
The fact is, not having a credit history can make other aspects of homeownership harder. You may be able to get by without one, but you’ll need to jump through extra hoops and pay higher interest rates and premiums to do it.
However, if you need a new home sooner rather than later, and your credit is less-than-perfect, the options above could help get you to your goal of homeownership a little quicker.
About the author
Zina Kumok is a Financial Health Counselor and Credit Counselor, certified by the National Association of Certified Credit Counselors, who writes extensively about personal finance.