Can You Buy A House With No Credit? Tips And Loan Options For Those With No Credit Score

Are you dreaming of owning your own home, but worried about your lack of credit? While having a good credit score is typically a crucial factor in getting approved for a mortgage, don’t let your lack of credit affect your homeownership status. Let’s explore what options are available to home buyers with no credit history.

Let’s start off with the easy answer. No, you don’t need credit to buy a house. Having an established credit history and a good credit score can improve your chances of qualifying for a mortgage. But if you are looking to buy a house with no credit, there are loan options available.

While the exact credit score typically needed to buy a house will depend on your lender, here are some ballpark numbers for different types of home loans:

• Conventional mortgage: 620 or better
• FHA loan with 3.5% down: 580 or better (This is the minimum score requirement at Rocket Mortgage^®)
• FHA loan with 10% down: 500 or better with participating lenders
• VA loan: 580 or better

Having a well-established credit history can increase your chances of better loan terms and lower interest rates. But what happens to home buyers with no credit or bad credit? Let’s take a look.

No Credit Vs. Bad Credit 

There’s an important distinction between having no credit and having bad credit. If a home buyer has no credit, they have no credit record or history. If a home buyer has bad credit, they have a credit record, but it’s likely tarnished by past mistakes.

If you have no credit, lenders don’t have a way to predict or measure the likeliness that you’ll abide by your loan terms. Even if you have a steady income, lenders will see your lack of credit as a risk because you have no track record of paying back debt. A poor credit score is often defined as a score below 600 on a 300 – 850 scale. If your credit score falls into this category, you may find that some lenders are reluctant to extend credit. Because a bad credit score can raise red flags for lenders, it can be easier for a home buyer to qualify for a mortgage with no credit rather than bad credit.

We’ve confirmed that potential home buyers can purchase a house with no credit history. Now, let’s see how it’s done.

Go Through Manual Underwriting 

Underwriting is the process your mortgage lender goes through to verify income, employment, debt and financial history to decide whether to give you a home loan. Manual underwriting is different from traditional underwriting because traditional underwriting is done using an automated computer process, while manual underwriting is done by hand. Manual underwriting is ideal for home buyers with no credit because it allows lenders to verify payment history in other ways. You can request proof of on-time payments from your landlord, insurance company, utility companies and more to verify that you pay your bills every month.

Make A Large Down Payment

A large down payment might increase your chances to qualify for a home loan. Typically, buyers make a down payment of at least 5%, but the more money you put down, the less of the total value of your home that you’ll have to borrow. If your lender can verify that you’ll likely be able to comfortably afford your monthly payments, you might qualify for a mortgage with no established credit history.

Find A Co-Signer

A co-signer is someone who agrees to sign your loan documents with you and assume responsibility for the loan in the event that you fail to make payments. Using a co-signer can be helpful for buyers with no credit, but co-signing a mortgage is a huge responsibility. For someone to qualify as a mortgage co-signer, they need good credit and a positive credit history.

Explore Nontraditional Lenders

Nontraditional lenders like small or online banks and credit unions often have more lenient lending standards than big banks. As a result, these types of lenders may be more likely to approve mortgages for home buyers with no established credit. Shop around for lenders to see their requirements and connect with a loan officer to see if you can work something out.

Now that you know there are ways to buy a house with no credit, let’s take a look at the mortgage options for first-time home buyers with no credit.

Conventional Loans

A conventional loan is a “conforming” mortgage loan that meets the requirements for Fannie Mae or Freddie Mac, the two government-sponsored enterprises that purchase mortgages from lenders and sell them to investors. The following requirements must be met by borrowers with no established credit in order to qualify for a conventional mortgage loan:

• DTI ratio: Without a credit score, borrowers must have a debt-to-income ratio (DTI) of no more than 36%.
• Down payment: With no credit history, borrowers need a down payment of at least 10%. This number is significantly higher than the 3% required for certain credit scores.
• Cash reserves: Borrowers must have 12 months’ worth of mortgage payments in the bank when they close on their home.
• PMI: Without a credit score, the private mortgage insurance for your conventional loan will be equal to what it would be if you had the lowest allowable credit score.

FHA Loans

An FHA loan is a mortgage backed by the Federal Housing Administration. These loans help people purchase a home when they otherwise might not be able to. This program generally targets first-time home buyers, but the FHA allows lenders to consider borrowers with no established credit by finding other ways to verify an applicant’s on-time payment history.

Additionally, FHA loans generally require two different types of mortgage insurance. You’ll have to pay an upfront mortgage insurance premium of 1.75%, as well as monthly mortgage insurance payments.

To qualify for an FHA loan, you’ll need:

• 3.5% down and a credit score of at least 580
• 10% down and a credit score of at least 500, with participating lenders
• A debt-to-income ratio of 43% or less

VA Loans

A VA loan is a mortgage backed by the Department of Veteran Affairs. These loans are designed specifically for military veterans who meet certain service length requirements. There is no minimum credit score required by the VA to qualify for a VA loan, but most lenders have a required minimum score.

USDA Loans

A USDA loan is a mortgage backed by the U.S. Department of Agriculture. These loans are generally available to low-to-moderate income earners who live in a qualifying rural area.

USDA loan lenders typically require a credit score of at least 640, but using the manual underwriting process, buyers with no credit score may qualify for a USDA loan as long as they provide at least 12 months of payment history in another way.

Home buyers can certainly purchase a house with no credit history. However, building credit can improve your mortgage loan options and help you qualify for better rates. If you want to build or repair your credit in order to qualify for a mortgage, consider the following suggestions:

• Become an authorized user on someone’s credit card. One of the easiest ways to build credit is by becoming an authorized user on a family member’s or friend’s credit card. As an authorized user, you can use the primary account holder’s credit to establish your own credit history with zero liability and low risk.
• Open a credit builder card. If you’re ready to open a credit card, a credit builder card is a great place to start. Credit builder cards are designed for people with no credit history or a low credit score. As a result, they have low credit limits and a high annual percentage rate. These features help lenders reduce the risk of losing money in the event that the card holder fails to make payments.
• Apply for a credit card with a co-signer. Another option is applying for a credit card with a co-signer. Co-signing allows two people to share one credit card account, allowing both individuals to share the credit history. Unlike authorized users who don’t make credit card payments, co-signers share equal responsibility for the credit card and its payments. As a result, co-signing can be a riskier option than becoming an authorized user.

Start making strides to build your credit history, but don’t stress about your credit preventing you from being a homeowner. There are ways to purchase a house with no credit history. Take the first step toward homeownership and apply for a mortgage online to see what your loan options are.