Secrets to Buying a Home with No Credit

As a first-time home buyer with limited or no credit, you may face more challenges to get a mortgage than some people. For example, you may not have access to a large down payment, and perhaps you do not have the most stable work history.

But one of the biggest differences between many first-time home buyers and current home owners is the lack of a strong credit history. People who have had a mortgage for many years have an established payment history on a long-term debt. This generally results in a higher credit score over time. Paying your bills on time, especially on a long-term debt such as a mortgage, for many years indicates that you can handle financial responsibility and may give you a higher credit score.

A first-time home buyer has never had a mortgage, may not have a car loan, and may not even have credit cards. These traits could prevent you from having an established credit history. Without credit, it is difficult for lenders to know if you are a good risk or not for a mortgage.

For some, this can be the unintended consequence of living debt free. If you do not have evidence that you managed credit well in the past, there is little in the way of history on your credit report for them to make a lending decision.

If all sounds lost, don't worry. The FHA mortgage backed by the Federal Housing Administration is available for buyers with a limited credit history. FHA mortgage are available from most lenders. It is likely there is a lender in your area that can help you get a home loan even with limited credit history.

Overview of Credit Reports

Your credit report is a written record of all of the creditor accounts that belong or have belonged to you in your lifetime. Your credit report is a collection of information from three credit bureaus, Experian, Equifax and TransUnion. Each of them uses information on how you have paid your credit accounts to assign you a credit score. The higher your score, the more likely you are to make your payments on time.

While we do not know exactly how each bureau arrives at a credit score, we do know that payment history is the largest factor that affects one's credit score.

This is why people with a first-time home buyer often does not have a great credit score, typically in the 740 or higher range. This is because there is not adequate record of how you manage credit and making payments. But it is ok with some home loan programs to have average or poor credit. It even is ok to have limited or no credit in some circumstances. Even as a first-time buyer with no credit history, you may get your mortgage approved.

FHA Loans and Non-Traditional Credit

A first-time home buyer usually has a lower credit score than people who own homes and make their payments on time. This is usually because you may have a very limited history of managing your credit. Payment history is the most important factor in your credit score.

But this does not mean you should necessarily go get a car loan or a credit card before you try to get a mortgage. Seeking a new line of credit right before you get a mortgage can be viewed as a negative. Remember also that until you have made 12 payments at least on the loan, the impact on your credit score is limited anyway.

The better option with limited or no credit is to get an FHA loan. According to FHA rules, a borrower cannot be rejected for simply not having a traditional credit history. FHA mortgage lenders are required by law to look at every aspect of the mortgage application and not just credit history.

This is great for people with a limited credit history; it is estimated there are at least five million Americans with no credit history. If they have a good job and income, they still may be able to get a loan through FHA.

The FHA-approved lender may look at other factors, such as your utility bill payments and rent payments to make a lending decision. Also, if you can show that you have been working in the same job for the last two years and have steady income, you may be able to qualify.

Some first-time buyers with a limited credit history could even get a down payment of only 3.5%. So, do not despair if you do not have a credit history and want a mortgage loan