Are you a first time homebuyer with NO credit history? If you’ve strived to live debt-free until now, you may be faced with an unintended consequence of having taken out no loans – you don’t have any established credit history. Your credit score and credit history are two of the factors that mortgage lenders weigh most heavily when reviewing mortgage application, so if you have no credit history you may be at a disadvantage compared to other prospective buyers.
Don’t lose hope though – there are some easy ways to quickly build credit and other ways to qualify for a mortgage loan, even if you have NO credit history.
Why is my credit history important? Shouldn’t solid job history and income be enough?
Your credit history is important because it shows lenders that you repay your debts on time and in full (or, that you don’t do so – depending on what your credit report and credit score show). It shows them that you are not financially overextended and that you are likely to pay them back the money they have leant you. The longer you manage credit responsibly and repay your loan obligations on time each month, the higher your credit score will be. The more you responsibly handle credit cards and carry less than a 30% balance of debt to available credit on them, the higher your credit score will be. Mortgage companies don’t want to be stuck with homes in foreclosure that they have to arrange sale on and one way to protect themselves is by requiring certain minimum credit scores in order to qualify for a mortgage.
How can I build my credit history?
You build a credit history when companies and organizations report to the credit bureaus about you. One easy way to build credit history without taking out a loan is to ask your landlord if they can report your on-time rent payments each month to one or more of the credit bureaus. Many larger landlords are willing and able to do this; which will help you build your credit history immediately. If your landlord can’t (or won’t) report to credit bureaus, you may want to look into applying for a credit card or into taking out a small loan to make a purchase you intended to make in cash so that you can build your credit history.
If you don’t want to take out any loans in order to build your credit, don’t give up your dream of home ownership. The good news is that federal government backed FHA mortgage loans, which are backed by the Federal Housing Authority; do not have traditional minimum credit score requirements!
The FHA’s own website advises that: "Lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application." FHA mortgage guidelines require that lenders look at applicant’s as a complete package – not just as a credit score when reviewing a mortgage application. Additionally, FHA loans require only a 3.5% down payment on a mortgage, which is an added bonus to most first-time homebuyers.
If you have no established credit but want to purchase a home in the near future, your best bet is likely to contact an experienced FHA mortgage lender. FHA-approved mortgage lenders will be able to review your job history, income and assets (as well as any debts you have) and advise you about your eligibility for a mortgage loan.