How to Get a House Loan With No Credit: A Step-by-Step Guide

Buying a house is an exciting milestone in life. However, it can be challenging if you have no credit history. You may wonder, “How do I get a mortgage with no credit?” The good news is, it is possible to get approved for a home loan even if you don’t have an established credit score. In this comprehensive guide, we will walk you through the step-by-step process to get a mortgage with no credit.

Why Lenders Want To See Your Credit History

When you apply for a mortgage, lenders want to see your credit report and score to assess your creditworthiness. Your credit report shows your track record of repaying debts and other financial obligations. Your credit score is a three-digit number calculated from your credit history information.

Lenders prefer working with borrowers who have good credit scores. A good credit score indicates you are likely to make timely mortgage payments. On the other hand, a poor score suggests you could be a high-risk borrower.

So if you have no credit history, lenders have no way to judge if you can handle mortgage payments responsibly With no track record, you are an unknown credit risk to them

Loan Options When You Have No Credit

Lack of credit history limits your mortgage choices but doesn’t rule out homeownership altogether. Here are some options to consider:

FHA loans – The Federal Housing Administration insures these mortgages, so lenders can approve borrowers with lower credit scores or insufficient credit histories. FHA loans allow down payments as low as 3.5%.

VA loans – These mortgages guaranteed by the U.S. Department of Veterans Affairs have no minimum credit score requirements. Veterans and active military personnel are eligible.

USDA loans – For low-to-moderate income borrowers in rural areas, the US. Department of Agriculture backs these mortgages. Applicants can have no credit score

Portfolio loans – Banks and community lenders offer these non-conforming mortgages. They keep the loans in their portfolio instead of selling to Fannie Mae or Freddie Mac. Credit standards are more flexible.

Hard money loans – Specialty lenders provide these short-term real estate loans. They are secured by the property itself. Rates and fees are high.

Seller financing – The seller acts as the lender. These deals work best if you know the seller well. Credits standards can be negotiable.

4 Strategies to Get Approved With No Credit

While the above mortgages offer possibilities, approval is not guaranteed. You will likely need to take extra steps to overcome having no credit history. Here are some tips to boost your chances:

1. Get a Cosigner

Adding a cosigner with good credit is one of the easiest ways to improve your mortgage eligibility. Your cosigner agrees to take equal responsibility for the loan. If you fail to make payments, the cosigner must pay.

Of course, cosigning is risky. Make sure your cosigner understands the obligation and can comfortably handle the payments if needed.

2. Make a Large Down Payment

Putting down 20% or more of the home’s purchase price shows lenders you are financially committed. With more equity in the property, lenders face less risk if you default. Ask the lender how much of a down payment boosts your no-credit mortgage chances.

3. Go Through Manual Underwriting

Most lenders use automated underwriting systems that rely heavily on credit scores. With manual underwriting, an actual person reviews your application and supporting documents.

Provide alternate evidence that you pay bills reliably and have the income and assets to support mortgage payments. Documents may include utility payment records, bank statements, pay stubs, and tax returns.

4. Work with Credit Unions or Online Lenders

Big banks and mortgage companies often use strict automated underwriting. For more personalized treatment, try smaller lenders like credit unions or online mortgage companies.

Their loan officers may have more leeway to make exceptions for special cases like no credit borrowers. But policies can still vary, so check guidelines with each lender.

Gather Supporting Documents

To improve your chances in the manual underwriting process, pull together documents that help verify your financial stability:

• Rent payment history – Have landlords write letters showing your on-time payments. Provide copies of money orders or canceled rent checks.

• Utility and cell phone bills – Gather 12 months of payment records showing you pay these monthly expenses consistently.

• Bank statements – Share 2-3 months of checking and savings account statements to confirm you have cash reserves after closing.

• Pay stubs – Supply most recent pay stubs to validate your income. Include documentation for any other income sources.

• Tax returns – Provide returns from the last 1-2 years to further confirm your earnings.

• Down payment proof – Show transaction records demonstrating you have funds for the down payment and closing costs.

Alternative Credit Reports

Some lenders accept alternative or nontraditional credit reports in lieu of conventional credit reports from Equifax, Experian, and TransUnion when underwriting manual loans.

These reports document your payment histories related to recurring expenses like rent, utilities, insurance policies, cell phone bills, and more. They demonstrate your ability to responsibly manage monthly bills.

Ask lenders if they will consider alternative credit reports for borrowers with no credit scores. Companies that provide these reports include PRBC, FactorTrust, and LexisNexis.

Expect to Meet Standard Requirements

While lenders may overlook your missing credit scores, you’ll still have to meet other key mortgage qualifying benchmarks:

• Down payment – Have at least 3.5% to 20% of the purchase price, depending on the loan program. The more you put down, the better.

• Income – Prove you earn enough from employment, assets, or other sources to afford the monthly payments.

• Debt-to-income ratio – Keep your total monthly debt payments below a certain percentage of your gross monthly income. Often 36% or less.

• Home appraisal – The property must appraise for equal to or higher than the purchase price.

Shop Multiple Lenders

Each lender has its own requirements and comfort level with no-credit buyers. Meeting with several lenders expands your chances getting approved. Come prepared with your supporting documents so loan officers can make quick decisions.

Mortgage brokers can also help you compare multiple lenders at once. Online lenders like SoFi, LendingTree, and Lenda are other convenient options. But don’t worry, visiting local banks and credit unions is still worthwhile too.

Pro tip: Limit loan applications to avoid too many hard credit inquiries dragging down future scores.

Explore FHA-Insured Loans

FHA loans can provide more accessible financing for no-credit buyers compared to conventional mortgages. Here are some key facts if considering an FHA mortgage:

• Only need a 580 minimum credit score or no score with some lenders
• Lower down payments of just 3.5%
• Requires upfront and annual mortgage insurance premiums
• Maximum loan limits vary by metro area
• Household income limits apply

Talk to FHA lenders to learn their specific underwriting policies on credit scores. Lenders like Quicken Loans, LoanDepot, and Fairway Independent Mortgage offer FHA loans.

Be Realistic About Your Budget

Owning a home is exciting, but know your financial limits as a first-time buyer. Be realistic about the mortgage payment and other costs you can truly afford. Also factor in savings goals, retirement funding, college tuition needs, and other big expenses you may have besides a house.

Crunching the numbers honestly will help guide smart decisions on your purchase price and loan amount. Don’t overextend your budget just to get into a home. Make sure homeownership fits within your bigger financial plan.

Start Now to Build Credit

Opening new credit accounts now gets positive information reporting on your credit reports and establishes scores over time. Some options:

• Ask to become an authorized user on someone else’s credit card. Their account history becomes part of your credit record.

• Apply for a secured credit card. Make a cash deposit that becomes your credit limit. Use it responsibly.

• Have a friend or family member cosign a new credit card with you. They share responsibility for the account.

• Take out a credit builder loan. The lender reports on-time payments to credit bureaus.

Building credit for 6-12 months before applying for a mortgage can open up better loan choices and rates.

Partner With a Reputable Lender

Finding the right lender makes a big difference in getting a no-credit mortgage approved. Look for an ethical lender committed to helping consumers like you become homeowners. Develop an open line of communication so they understand your financial situation. Ask questions and learn what else you can provide to improve the chances of getting a green light. With persistence, getting a mortgage with no credit is doable.