The first-time home buyer often faces challenges not seen by people who have previously owned a home.
Saving for a down payment is a big one. Not having a stable work history is another.
Another is having little or no credit history. The good news is that it’s possible to become a first-time home buyer even without a traditional credit score.
Don’t Be Penalized For Being Financially Responsible
Do you own the car that you drive outright? Do you use a debit card instead of a credit card? Do you pay cash when you go out for dinner?
These are good habits to have when saving for a down payment. They're also habits that can result in you not having a credit history. But they shouldn't prevent you from qualifying for a mortgage.
When you have no credit, you’re in better shape to qualify for a FHA loan as a first-time home buyer than if you have bad credit. If your FICO credit score is below 500, you’re likely out of luck. But if you have no credit score, the FHA has a process to qualify you to become a homeowner.
The First-Time Buyer And Independent Verification Of Credit References
It takes a little more time and maybe a little more work because you and the lender cannot simply pull a merged credit report from the three big credit bureaus. Here's how an FHA mortgage can be obtained without a credit report:
A lack of credit history, or the borrower's decision not to use credit, cannot be used as the basis for rejecting the loan application, according to HUD.
Some prospective borrowers may not have an established credit history.
For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report from a credit reporting company, or develop a credit history from utility payment records, rental payments, automobile insurance payments and "other means of direct access from the credit provider," according to the federal agency.
Another Option for The First-Time Buyer
Even when non-traditional credit information is not available, there is still another option.
Maybe you had a driving ticket that you paid off with installments. Or some other financial arrangement with a government agency. Or paid your income taxes over time.
These credit references can come from city, county, state or federal agencies. Other references are acceptable as long as they can be documented as objective information.
A property management company that reports to the credit bureaus will even work.
What you need to know is that lenders won’t take your word alone. They can accept the most recent 12 months of cancelled checks or a rental reference from a management company.
Your non-traditional credit provider will need to have a published address or telephone number for verification purposes.
If you didn’t know before, you do now: the FHA offers mortgages to the first time home buyer, even without a credit history.
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