Can You Buy A House With No Credit?

Have you ever considered owning a home, your own little piece of heaven? Your journey toward homeownership is entirely possible, even if credit challenges have cropped up. A lackluster credit history doesn’t have to be a barrier to homeownership.

Believe it or not, about 45 million Americans have very little credit history – or no credit at all.

While having a good credit score and history can increase your chances of qualifying for a mortgage, these factors aren't the only ones banks consider when it comes to providing mortgages. Not to mention the fact that it can be possible to buy a home without any mortgage at all.

Let’s take a closer look at the options available to buy a house without credit.

Can I Buy A House With No Credit?

If you're one of the millions of Americans without any credit, you might be wondering if getting a mortgage with no credit history is even possible. The good news is, yes – it's absolutely possible.

However, it's not as simple as strolling into your bank and walking out with a loan.

What Is The Minimum Credit Score For Getting A Mortgage?

The minimum credit score for getting a mortgage will depend on a few factors, including the type of loan and the specific lender you're applying with.

In general, these are the minimum credit scores required:

• Conventional mortgage: 620
• Federal Housing Administration (FHA) loan: 500
• Department of Veterans Affairs (VA): 580

The VA technically doesn't even specify a required minimum for their loans. It's up to the lender to decide. In some cases, you may not even need a credit score.

In general, the higher your credit score, the more likely you are to be approved for a mortgage and the better your terms will be. A credit score of 700 or higher is considered good, while a score of 800 or higher is excellent.

You can buy a home even if your credit score is lower than 600 (or nonexistent). You will likely just pay more in interest. The average annual percentage rate (APR) is about two to three percentage points higher for someone with a lower credit score. While that doesn't seem like much, it adds up to several thousand dollars paid in interest over time.

What Other Factors Impact Mortgage Qualification?

It's true that, without a credit score, it will be tougher to qualify for a traditional mortgage. But there are other factors that lenders take into consideration when assessing your eligibility, too.

Debt-To-Income Ratio (DTI)

One important factor is your debt-to-income ratio (DTI). This is the percentage of your monthly gross income that goes towards paying your debts. Without a credit score, lenders will likely require you to have a DTI ratio of no more than 36%. This means that your total monthly payments, including your new mortgage payment, should not exceed 36% of your gross monthly income.

Cash Reserves

The larger down payment you can make, the more likely it is that you'll be able to qualify for a mortgage.

Lenders also want to see that you have enough cash reserves to cover your mortgage payments in case of any unforeseen circumstances. Without a credit score, they will require you to have at least 12 months' worth of mortgage payments in the bank when you close on your home. You'll need to be able to demonstrate that you have a stable income and employment history, as this shows them that you can make your mortgage payments on time.

Of course, the cost of the home itself is also a significant factor. Without a credit score, lenders may be more cautious about approving a larger loan amount, so you may have to negotiate a bit on what type of home you ultimately purchase.

How To Buy A House With No Credit History

With a bit of preparation and patience, you can get approved for a mortgage – even without any credit history to speak of. To start, you'll want to check to see if you have any credit history at all. Then you can search for lenders that originate no-credit loans or lenders that will manually underwrite your loan as an alternative to traditional underwriting or getting a co-signer to help you get a loan.

Go Through Manual Underwriting

During a typical underwrite, a human reviews documents and looks at qualifying factors like your income and employment history before sending them to an automated underwriting system, or AUS. The AUS takes the factors the underwriter sends and matches them to the relevant investor’s (for example Fannie Mae) guidelines and risk tolerance.

Manual underwriting usually refers to loans not sent to an AUS or that have factors (such as no credit) that cannot be evaluated. Both types of underwriting use all the factors mentioned to create a risk profile. Typically with a client with no credit, underwriters are looking for alternative credit like steady rent payments or utility payments.

This process gives you the opportunity to prove your creditworthiness in a more tangible way. While it can take longer than the traditional method, it can be a lifesaver for aspiring home buyers with no credit.

Make A Hefty Down Payment

When it comes to buying a home, the more money you can put down upfront, the better. This applies to everyone, but especially those without credit scores.

If you can, try to put at least 20% down. This might seem like a large amount, but it will pay off in dividends. Not only will it reduce your monthly mortgage payments, but there will be less risk for the lender and a better likelihood of you getting lower interest rates and better overall terms on the loan.

Get A Co-Signer

Of course, not everyone has that 20% lying around in their bank account. That's where a co-signer can come in handy.

This is a person, usually a family member or friend with a solid credit score, who would legally agree to pay back your loan and promise to make payments if you are unable.

Bring Proof Of Payments

Remember, lenders want to see that you're a responsible borrower. Even if you don't have a credit history to demonstrate this, you can give them the evidence they need by bringing in proof of payment. Some items that help prove you’re responsible include your paid bills, such as rent, utilities and cell phone plan.

Plan For Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is basically an added monthly expense to protect lenders in case you default on your loan, and it can add up over time. If you're able to avoid it by putting 20% on a down payment, that will be incredibly helpful when it comes to the lifetime costs of your loan.

Do The Math

A good rule of thumb is to make sure your mortgage payments are no more than 25% of your monthly take-home pay. This may mean you have to adjust your home search or your budget, but it's better to be realistic about what you can afford than to end up in a home you can't sustain financially.

What Are the Best Types Of Loans For Buying A House With No Credit?

Outside of conventional loans, there are a few types of loans you might want to consider:

• FHA loans: If you're able to put at least 3.5% down, you may qualify for an FHA loan, which is backed by the Federal Housing Administration. Unfortunately, you will likely need to have some credit (generally a credit score of at least 580). If you can put 10% down, you can qualify with a credit score of 500 or less with participating lenders.
• VA loans: VA loans are backed by the Department of Veteran Affairs and require no minimum credit score, though some lenders may still require a minimum credit score.  They're available to active-duty members and veterans, along with their spouses. There's also no down payment required, which is attractive to many borrowers.
• U.S. Department of Agriculture (USDA) loans: If you're looking to buy a home in a rural area, this program, designed to help low- to moderate-income families buy a home, may be an option for you. These loans are backed by the U.S. Department of Agriculture and require no down payment or minimum credit score through the manual underwriting process.
• Land contract: A land contract is an agreement between the buyer and the seller, in which the seller acts as the lender and finances the purchase. The buyer will make monthly payments to the seller, which includes both the principal and interest. The buyer will also be responsible for property taxes and insurance.

Practice Good Credit Habits Before You Start The Home Buying Process

While looking for a home can be an exciting process, there are ways to start building and improving your credit score to get yourself in the best position possible. Let’s take a look at some of the best credit practices to use as you start looking for a new home.

Review Your Credit History

Even if you don't think you have any credit, you need to take some time to check your score. You may have some credit history that you're not even aware of, like an old utility bill or cell phone bill. These can appear on your credit report and affect your score, so you need to pull your report to see what's listed.

You can get a free copy of your credit report from each of the three major credit bureaus (Equifax^Ⓡ, Experian™ and TransUnion^Ⓡ) once a year.

Understand What Factors Affect Your Credit Score

Credit scores are calculated using five different debt categories, each of which is assigned a different weight. Debt history is a big part of that equation (35%). However, the debt amount, how long you've been in debt and the type of debt also play important roles in your overall score.

Hold on before you run out and apply for new lines of credit. Applying for too much credit, too quickly can actually hurt your score.

It's best to give yourself some time to do this. If you're planning on buying a house and know you don't have any credit to speak of, you may want to extend your home buying timeline by a few years. As you open accounts and pay your bills on time, your credit score will improve and you'll be more likely to get approved for a mortgage.

Become An Authorized User

An easy way to start building your credit is to become an authorized user on someone else's credit card. This means that the primary account holder adds you as an authorized user to their account, and you get your own card with your name on it. You don't have to use the card or make payments on it, but the card's activity will show up on your credit report and can help boost your score.

Apply For A Loan Or Credit Card

You could also take out a small loan or credit card with a low limit and make regular, on-time payments. Another option is to ask a family member or friend to cosign on a loan or credit card for you.

Just remember that it takes time and patience. Don't try to rush the process.

The Bottom Line: You Can Buy A House With No Credit

Ultimately, it’s possible to buy a house without any credit or credit history, you just might need to get creative. By taking the steps described above and getting your finances organized, you can secure a mortgage even if you have a nonexistent credit score.

If you're ready to start the process to get you in the home of your dreams, start a mortgage application today.