Or, contact a mortgage broker. These lending professionals work with multiple companies and have access to many different loan products. They’ll know which lenders offer the right programs and are willing to consider applications with no credit history.
A credit report is a written history of all creditor accounts which belong, or have belonged, to a person in their lifetime.
Credit reports are a compilation of information from credit bureaus, which are companies to which creditors report borrower payment history on a regular basis.
In the mortgage space, there are three main credit bureaus – Experian, Equifax, and TransUnion. Each bureau uses the information available to it to assess your individual credit score.
Your credit score is a numerical value that sums up the information on your credit reports. The higher your credit score, the more likely you are to make payments. That’s why lenders reward borrowers with good credit scores by approving them for larger loan amounts and lower interest rates.
The algorithm which uses your credit report to determine your credit score is cloaked; we don’t know how each line item affects the final score. However, we do know that your payment history is the single biggest factor in determining your credit score.
This is why first–time home buyers rarely have credit scores that are “excellent.” There’s just not enough history of managing credit and making payments to make that kind of determination.
Don’t try to build credit last–minute
You might be tempted to build up your credit score by opening new credit cards or even taking out a loan before you apply for a mortgage. Do not do this.
Unless you’re a year or more from buying a home, opening new lines of credit would actually do more harm than good.
‘Credit inquires’ (applications for new lines of credit) have a negative effect on your credit report. They may only ding your score a few points, but multiple inquiries in the time leading up to your application will give a lender pause.
In addition, it takes time to build up credit. Until 12 months of payment history exist for each of the new accounts, the effect on a borrower’s credit score is heavily muted.
Any new debt will increase your ‘debt–to–income ratio’ (DTI). DTI measures your total debt payments against your monthly pre–tax income. Mortgage lenders use this number to see how much room is ‘left over’ in your budget for a mortgage.
The higher your existing debts, the less mortgage you’ll be approved for. So you want to avoid taking on large debts like a car loan or personal loan in the time leading up to your home purchase unless it’s absolutely necessary.
Of course, if you’re still more than a year out from buying a home, it’s a great idea to start building up credit. The stronger your credit score and report, the better deal you’ll get on your mortgage.
Bad credit vs. no credit
Having a low credit score is different from having no credit score. It may be better or worse, depending on the reason for your low score.
Lenders typically want to see a clean credit history, meaning you haven’t had a bankruptcy, foreclosure, multiple late payments, or other negative credit information in recent years.
If you have a lower credit score because you’ve consistently mismanaged debts in the past, a lender will be much less likely to approve you for a mortgage.
The death of a spouse or primary wage earner, divorce, large medical debts, and other unexpected events can take a big toll on someone’s finances.
