Buying a House with Little or No Credit

Although it can be difficult, homebuyers can purchase a house with thin credit

02/27/2017

Buying a House with Little or No Credit

As with any major purchase that requires a line of credit, the process of buying a home starts with your credit score; the better it is, the better your chances of being approved for a loan. But what happens if you have little or no credit history, as is the case with many first-time homebuyers?
 
Fortunately, all hope is not lost if you don’t have a credit history or are just starting to establish a credit history, also known as having thin credit. 
 

Understanding why established credit is advantageous

While some financial gurus will tell you to live debt-free with no credit cards or car loans, doing so can actually hurt your ability to apply for a mortgage and buy a home, according to a May 2015 article on Bankrate.com by contributor Marcie Geffner.

Homebuying typically requires credit, as a 2014 poll shows only 5 percent of Americans were able to purchase their home outright, Geffner reports. This means establishing a credit history and a good score is necessary and important if you are planning to buy a home in your lifetime.
 
According to a November 2016 article in The Mortgage Reports by contributor Erik Sherman, a credit report is an account of all the lines of credit and loans under the person’s ownership during his or her lifetime, which is compiled by several credit bureaus. These companies receive the borrower’s credit history by the creditor company on a regular basis and use this data to calculate a credit score.
 
Furthermore, credit scores are determined by a number of factors, the single largest of which is payment history, including timeliness. Your score reflects your calculated ability to pay back borrowed funds, with a high score indicating a high chance of your making your payments.
 
“Call it the unintended consequence of debt-free living: with no visible evidence that you’ve managed credit accounts in the past, mortgage lenders become (rightfully) nervous about your ability to repay on a loan—there’s no history for them to go on,” says Sherman.
 

Alternative options for purchasing a home

Geffner suggests two options for purchasing a home if you lack a sufficient credit history.
 
The first is to create an alternate credit history using other financial reports, like rent checks, utility bills and insurance premiums. However, this process can become time consuming and not all lenders have the resources to do it for you. Additionally, Geffner warns that you could end with a less-than-favorable credit score if the data dates back only a few years, which will mean paying a higher interest rate than if you had a good credit score with a traditional history.
 
The second option is to open a credit card, make a purchase with a modestly large charge and make at least the minimum payment for twelve months before applying for a mortgage. Even a year of established credit history is better than none, and at sixth months you’re eligible to receive a calculated FICO score. Some programs will require a minimum of three unique trade lines.
 
Be wary of opening a new line of credit if you don’t have the time to establish a solid payment history before applying for a mortgage, Sherman warns.
 
Opening new lines of credit, like credit cards or a car loan, is not optimal for short-term credit history and could actually do more harm than good in trying to establish credit. This is because credit bureaus calculate new lines of credit as a negative, because they’re considered debt in a consumer’s purchasing history.
 
Instead, turn to a mortgage loan professional for help. You can learn more about the importance of having good credit, how you can improve your credit scores, and how to prepare for home ownership.
 
At North Shore Bank, we strive to be an asset and partner for our clients. We encourage people to get started as soon as possible and consider attending our free series of Money Smart Seminars. Check our Community Calendar for upcoming seminars that focus on the basics of establishing and building credit. Experts discuss why good credit is important to you, how to boost your credit score, and find ways to reach your financial goals faster. Plus, you will learn about low down-payment and grant assisted home purchase programs.
 
In the end, buying a home is not impossible without credit history, so long as you know your options.


Published by North Shore Bank. Includes copyrighted material of IMakeNews, Inc. and its suppliers.

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