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A “good credit score” is often considered essential to buying a home and securing the best interest rates. In a financial landscape heavily reliant on credit scores and credit histories, individuals who have yet to establish their credit footprint may wonder if homeownership is an achievable dream.
It’s not always the easiest path, but with the right strategies and an understanding of the lending landscape, prospective homebuyers with no credit can navigate the path to property ownership.
Can you buy a house with no credit?
Yes, it’s possible to buy a house with no credit, but it can be more challenging. Mortgage lenders typically rely on your credit history and score to assess your creditworthiness and determine your mortgage terms. Lenders may view you as a higher-risk borrower if you have no credit history, making it harder to qualify for a mortgage or result in less favorable loan terms.
No Credit Vs. Low Credit
Often, when an aspiring homebuyer says they have “no credit,” they really mean they have a low credit score. In reality, having no credit and having low credit are different situations, but they can both impact your ability to secure a home loan.
No credit means that you have not established any credit history or accounts in your name, or that you closed all accounts that would generate a report on your credit history. This often occurs when you are young and have yet to have the opportunity to build credit or if you’ve never used credit products like credit cards or loans. When you have no credit, qualifying for traditional loans and credit cards can be challenging, as lenders have no basis to evaluate your risk as a borrower.
Low credit, on the other hand, means that you have a credit history, but your credit score is lower than what is considered good or excellent. What is considered to be low credit varies by the type of home loan you are considering, but the typical benchmarks are as follows:
Conventional Loans: Generally require a minimum credit score of 620 to 680 or higher, depending on the lender and the specific loan program.
VA Loans: While the VA doesn’t have a set minimum credit score requirement for VA loans, most lenders prefer borrowers with a credit score of 620 or higher.
USDA Loans: The USDA also doesn’t set a minimum credit score requirement, but most lenders typically require a minimum credit score of 640 or higher for USDA loans.
It’s important to note that your credit score (or lack of one) is just one factor that lenders consider when approving a mortgage. They also assess other aspects of your financial situation, including your income, employment history, and debt-to-income ratio. If you’re attempting to buy a home with no credit, these additional factors will be your keys to qualification.
» MORE: See today’s refinance rates
How to Buy a House with No Credit
Like any other loan applicant, you’ll need to prove you have a solid financial standing and can be trusted to repay your mortgage. Without a credit history, you’ll have to take more steps to demonstrate these safeguards to your lender.
Establish that you have a stable income. Lenders will want to see that you have a recurring source of income that is likely to continue. Stable income will also help you save money for a down payment and closing costs. Many lenders will require a larger down payment that can help compensate for the lack of credit history and improve.
Balance your budget. Lenders will want to ensure you don’t plan to devote too much of your income to housing payments. Your debt-to-income (DTI) ratio measures how much your overall budget will go toward your housing debt repayment. Each lender has a maximum DTI limit. Creating a detailed budget that showcases you are below the DTI limit will ensure that you don’t get rejected or, worse, end up with a mortgage that’s too expensive.
Choose the right lender. You will likely need to choose a lender open to financing no-credit home loans, as not all do. These lenders will perform a manual underwrite, which is when a human underwriter carefully reviews and assesses the borrower’s financial situation instead of a computer. Manual underwrites usually take longer, and you’ll need to provide your lender with more information.
Prepare the necessary documents. Lenders will want to see a comprehensive collection of financial documents that include proof of income, employment history, bank statements, home and auto rental history, and any other documentation that shows your financial stability and ability to repay the loan. Coming with these documents prepared and organized can speed up the underwriting process immensely.
Consider adding a co-signer. Including a co-signer with a stronger financial standing or credit history can increase your chances of being approved. A spouse, partner or parent co-signer can help offset your lack of credit history.
The Bottom Line
At its roots, a credit score is supposed to represent the financial reliability of a borrower. Still, it’s not the only defining factor. While it certainly isn’t impossible to get a no-credit score mortgage, you must come prepared with a solid financial standing, the ability to repay, and the documentation to prove both.