If you are considering buying a house but have not yet built up a credit history, you may find it very difficult to find a lender who is interested in working with you. This is because lenders use your credit history to determine what kind of a financial risk you pose to them.
No credit usually means no loan. So what should you do if you really want to buy a house? The following tips and information may be able to help you understand how to buy a house with no credit.
Just make sure you're covered with an affordable home insurance policy.
First, Are You Sure You Have No Credit?
You may think that because you have no credit cards and have not made any large purchases such as a car, that you have no credit. You may, however, be wrong about that. Amy Fontinelle at Investopedia writes, “You might be surprised to find that because of a gym membership or a student loan, you actually do have a credit history. It may be very short, but it may be all you need.”
You can learn about your credit history and profile by requesting copies of your credit report from the three credit reporting agencies: Equifax®, Experian® and TransUnion®. Do not pay to get these reports. You are entitled to a free copy of each of the reports once a year. Also, if you are turned down for a credit card or a loan, you may also request, and receive, a free copy of your credit report. You should never pay to see your credit history.
Work on Establishing Credit
This is the most obvious solution, but for many people who are just starting out, understanding how to go about establishing and building isn’t always clear. Perhaps you have been living with your parents while saving up for a house, or perhaps you prefer a cash only system of payments. Whatever the reason for your having no credit, it may be time to build it.
Some ways you can establish a credit presence include:
- Get some credit cards: The easiest way to get a credit card when you are starting out is by getting cards that are good only for purchase at a specific store. Retailers are more likely to issue credit cards to someone without a credit history because these cards result in brand loyalty. If you cannot qualify for one of these cards, financial expert Suze Orman suggests you get a secured credit card, wherein you prepay for your purchases. These cards also help to build credit. Do not apply for too many cards, because this will hurt, rather than help, you. But get two or three and use them. If possible, pay them off in full each month to avoid interest charged, but by all means, be sure to pay the bills on time. You don’t just want to establish credit; you want to establish good credit.
- Have utilities turned on in your name: If you are living with your parents or in an apartment that has utilities included, this may not be feasible. But if you are sharing an apartment with a group of people and one of them is handling utilities, ask if you can have the utilities switched to your name. Be sure that those you are living with will pay their share faithfully and that you remember to pay the utility bills on time each month!
- Get a cell phone plan in your name: Most adults today have a cell phone. If you do not, or if you are on another person’s plan, it may be time to get on a plan in your own name. Making on-time payments for your cell phone plan each month will help you to establish a positive credit profile. Many cellular service providers will enable you to have monthly payments automatically deducted from your bank account. This helps to eliminate the possibility of late payments.
Whatever you do to start establishing credit, remember, it will not happen overnight. Lenders need to see a long history of financial responsibility.
Have a Large Down Payment
If you want to get a mortgage lender but still have not yet built up a substantial credit history, having a lot of money saved up to use as a down payment on a house can help a lot. Mortgage lenders know that those who have made an initial investment of at least 20 percent of the value of the home they are purchasing are not likely to default on their mortgage.
As Jason Van Steenwyk explains, “Lenders like to see the borrower have some skin in the game. With borrowers upside down on their homes simply mailing their keys back to the bank, and sticking lenders with negative equity rather than toughing out the down market and keeping their homes, lenders now want to know that you’ve got a personal stake in the deal.”
As an added bonus, the more you put down at closing, the lower your monthly payments will be and the more you will save in interest over the life of your loan.
Consult Your Bank or Credit Union
Sometimes, your best bet for finding a lender when you are first starting out is to talk to a loan officer at the bank where you have your money. As Gigi Starr of SFGate writes, “In the spirit of customer retention, a bank will try to assist a customer with a reliable history of account usage.”
Many young adults tend to bank at the same place where they had savings accounts as children. If your bank can see a long history of financial responsibility, including no instances of insufficient funds or overdrawn accounts, they may be more likely to accept a very recently established credit history when determining whether or not to write you a mortgage loan.
Also, if your employer offers credit union services and you are a member, you might have an easier time getting a mortgage there, particularly if you have been working for your employer for at least three years.
Consider Having a Co-Signer on Your Loan
Another way you can buy a house with no credit is to have a co-signer, such as a parent or relative, on your loan. This may not be the way you want to buy your first house, but if all else has failed, it may be your only option.
If you want the deed to the house to be in your name alone, you can always refinance at a later date, once you have established a solid credit history. Bear in mind, however, that refinancing a mortgage comes with fees and closing costs that can come to thousands of dollars, so unless you are refinancing to a mortgage offered at an interest rate that is at least one full percent lower than the one you have, it may not be a financially sound decision to do so.
Get on the Road to Homeownership
We wish you the best of luck in your pursuit to join the ranks of proud homeowners in the United States. Once you have found a lender willing to offer you a mortgage, remember that you will need to show proof of homeowners insurance before you can close on your loan. When you get to this point, contact a local independent agent in our network for help finding a suitable policy at a competitive rate.