How To Get Approved For A Home Loan With No Credit History

Getting approved for a mortgage can seem daunting, especially if you have little to no credit history. However, there are ways to get a home loan even if you don’t have an established credit score. In this article, we’ll walk through the step-by-step process for qualifying for and obtaining a mortgage when you have no credit.

Why You Might Not Have A Credit Score

There are a few common reasons why someone may not have a credit score:

• You’re young. If you’re a recent high school or college graduate, you likely haven’t had time to build up any credit history yet. This is common for first time homebuyers.

• You’re new to the country Immigrants or foreign nationals who have recently moved to the US. won’t have had time to establish domestic credit.

• You use cash. Some people simply choose not to use credit and pay with debit cash or checks instead. This means you won’t have credit accounts reported to the bureaus.

• You’ve been out of the workforce. People who exit the workforce for an extended period of time, like stay-at-home parents or caregivers, may lose their credit history if they stop using credit.

• You had credit problems in the past. After major credit events like bankruptcy or foreclosure, it can take years to rebuild your credit score.

How Lenders Evaluate Borrowers With No Credit Score

The first step is helping mortgage lenders understand your creditworthiness, even without a credit score. Here are some of the ways lenders can evaluate your finances:

• Review your employment history. Steady income is key to getting a mortgage approval. Provide W-2s, pay stubs, and letters from employers to verify your income.

• Check alternate credit sources. Lenders may look at records of rent payments, utility bills, insurance payments, or other bills paid regularly over the past 12-24 months.

• Require a higher down payment. Offering 20% or more as a down payment shows you’re financially prepared for homeownership.

• Interview you about how you manage money. Explaining how you budget and save each month helps lenders understand your financial habits.

• Order a non-traditional credit report. Companies like PRBC provide credit reports based on your utility payments, rent history, etc.

Types Of Loans For Borrowers With No Credit

These loan programs are more flexible when it comes to credit requirements:

• FHA loans only require a 580 credit score. They let you use non-traditional credit to qualify.

• VA loans don’t have a minimum credit score requirement for veterans and service members.

• USDA loans are available to low- and moderate-income borrowers in rural areas. No minimum credit score is needed.

• Portfolio loans offered by community banks and credit unions may have more flexible underwriting guidelines.

• Hard money loans don’t look at your credit at all, but come with higher rates and costs.

• Subprime loans are designed for borrowers with less-than-perfect credit, but make sure you understand the terms.

How To Improve Your Chances Of Approval

Here are some tips that can help boost your odds of getting approved for a mortgage without established credit:

• Have a down payment of at least 10-20%. The larger your down payment, the less risky you appear to lenders.

• Find a co-signer. Adding someone with good credit to your loan application can help. Make sure the co-signer understands they’re equally responsible for repayment.

• Pay down other debts. Reducing your recurring monthly debts improves your debt-to-income ratio.

• Avoid new credit inquiries. Each application for credit creates a hard inquiry on your report. Too many makes you look desperate for credit.

• Work on building credit now. Getting a secured credit card and making on-time payments can quickly start to establish your score.

Documents Needed To Apply For A Mortgage With No Credit

Gathering these documents early in the mortgage process helps verify your finances:

• Several years of W-2s and tax returns to show steady income.

• At least 12 months of bank statements to show consistent deposits and cash reserves.

• A written explanation of how you pay bills and manage finances without traditional credit.

• Two to three months of pay stubs to confirm your current income level.

• Alternate credit references like rental agreements, utility bills, insurance documentation.

• Contact info for employers and landlords who can verbally confirm your history.

The Mortgage Application Process With No Credit History

Here are the general steps to expect when applying for a mortgage with no credit score:

1. Get pre-approved. This shows sellers you’re a serious buyer and gives you a budget.

2. Provide alternate credit. Give lenders as much documentation as possible to illustrate your payment history.

3. Verify your information. Lenders will reach out to your employers, landlords, utility companies, etc. to confirm details.

4. Go through manual underwriting. A human underwriter will review your full profile rather than relying on a computerized credit score.

5. Submit final documentation. Supply updated pay stubs, bank statements, sales contracts, and other paperwork leading up to closing.

6. Get final approval. The underwriter gives the official approval and your interest rate and terms are locked in.

7. Close on time. Bring your down payment and closing costs to sign your mortgage paperwork and get the keys!

Tips For Building Your Credit After Obtaining Your Mortgage

Once you’ve been approved for and closed on a mortgage with no prior credit history, you’ll want to focus on building and maintaining strong credit. Here are some tips:

• Open a secured credit card and use it responsibly by paying your bill on time and keeping your utilization low. After about a year, you should be able to upgrade to an unsecured card.

• Become an authorized user on someone else’s credit card. Their good history will start to influence your score.

• Pay all bills on time including utilities, insurance, cell phone, and any other monthly expenses. Payment history is a major factor in your score.

• Check your credit reports annually for errors and file disputes as needed. Mistakes can drag down your score.

• Limit hard inquiries on your report by only applying for credit when you need it. Too many inquiries can be seen as risky.

• Keep overall credit utilization below 30%. Using too much of your available credit limits can negatively impact your score.

The key is using credit wisely. With some diligence, you can go from no credit history to a strong credit profile in just a few years!