Are you in the market to purchase a new home, but lack the credit necessary to make your dream become a reality? While some form of credit history is usually needed to qualify for a mortgage, there are some alternative routes you can take. Your path to success will require a little creativity and hustle, but if you're willing to put in the work, you can join the elusive club of homeowners.
With that said, here are 3 non-traditional ways you can solidify your dreams of owning a home:
If you plan to apply for a conventional mortgage, you should be aware that many of them will require at least a 20% down payment. Depending on the cost of a home, a down payment of 20% can be overwhelming. For those who have no credit history, the percentage of a down payment necessary to qualify is usually higher.
How you can make it work: If you're aiming to purchase a starter home and have a significant amount of savings built up, putting down more than the typical 20% may give you the leverage necessary to get a mortgage. The more you put down, the less of a risk there is to the lender if you were to default on the loan. Putting down more than 20% might seem like a lot, but for some, it's the only option they have.
Quick tip: An FHA loan from the Federal Housing Administration is commonly a go-to option for those who have little credit or a tarnished credit history. They are popular for their down payment requirement of only 3.5% and lower qualification guidelines. While the down payment is smaller, the costs associated with an FHA loan are much higher than a conventional loan. In most cases, you will pay private mortgage insurance (PMI) on a monthly basis to protect the lender in case you go into default. Even worse, many FHA loans are now requiring PMI to be paid on the life of the loan, even once your balance is less than 80% of the total loan amount (which is when you are no longer responsible for paying PMI).
These days, many lenders defer to software for most of their underwriting. Your application is fed through a program and tested against a series of specific requirements. If you are unable to meet the minimum requirements set for a loan, your application will be denied.
If you want the best shot at getting a mortgage due to your lack of credit history, you should consider working with a lender like CityWorth Mortgage who does their own underwriting. By going this route, you can often deal with them face-to-face and use a variety of non-traditional methods to prove your creditworthiness. Some examples they might use are things such as:
- Utility bills (electricity, phone, water, etc.)
- Insurance payments
- Rental payment history
Those are just a few of the many ways you can prove that you pay your bills on time. Of course, you will also need to have a steady job with a solid history of employment as well.
Should you decide to go this route, be aware that many lenders will require at least two years of payment history. If you are unable to make that happen, your chances of getting approved will be next to nothing.
If you have minimal credit history and won't be able to meet any of the requirements listed above, you're still in luck, but be forewarned: It will require getting a credit card. You might be wondering how you can get a credit card if your credit history is close to zero, but there is one card that is ideal for people in this exact situation: a secured credit card.
A secured credit card works exactly like a regular credit card, except that you need to put down a deposit before you can get the card. Your deposit sets your credit limit, and most providers have a specific range you can choose from. What makes a secured card attractive, however, is that your payment history is reported to the credit bureaus. As a result, you will be building your credit history one month at a time, thus putting you in a prime position to qualify for a mortgage over time!
One thing to consider: It will not help you out immediately. In fact, you will need some extra time on your hands in order to make this work. At least 6 to 12 months is ideal, which gives you enough time to establish a solid payment history and generate an actual credit score. Just use your card for regular monthly expenses and pay it off every month. By doing so, you will avoid interest charges and build your credit.