You’ve never had a credit card so you don't have any credit history. You want to buy a house, but you’ve always paid for everything in cash.
Can you get a home loan if you’ve never had credit? It depends. Even though you may feel like you’re the only one who lives this way, you’re not. The Consumer Financial Protection Bureau issued a report saying that “credit invisibles,” those people who have no credit report on file with the three major credit bureaus, make up about 13.6% of the U.S. population or about 45 million people. If you are a credit-invisible, should you pursue your dream of a no-credit home loan? It's worth a try, but it may take some effort.
What Lenders Are Looking For
Lenders will typically turn to your credit score to assess what kind of borrower you are. Each of the three credit-reporting agencies use a formula to calculate your credit score based on the information in your report, and it may vary slightly from agency to agency. However, since you don’t have a credit history, you won't have a credit score, either.
You still may be able to use the information contained in this formula if you want to apply for a no-credit home loan. That information will give you a clue concerning what mortgage lenders are looking for. The percentages of the components of the credit history that are used in the calculation of a credit score are:
- Payment history—35%
- Amounts owed—30%
- Length of your credit history—15%
- Types of credit used—10%
- New credit—10%
How to Demonstrate Your Reliability
Notice that the first component of the credit history that mortgage lenders consider, and the one with the most weight, is payment history. Instead of relying on a mortgage lender to use a credit score to determine whether they should extend you a loan, you will have to provide another form of proof to them that you make your payments on time and in full. Some lenders will allow you to substitute a payment history for a credit history, but only with proper documentation.
In order for you to have a chance to convince a lender to use your payment history in place of credit history, you may need to have at least one year of paid receipts, and possibly copies of cleared checks or other payment evidence. These items are called alternative credit data. Here are the most common types of alternative credit data:
- Cell phone, phone, and cable bills
- Utility bills that are not included in rent
- Insurance payments (car, life, health, etc.)
- Union dues
- School tuition
- Contributions to a regular savings plan or stock purchase plan
The specific alternative credit data and the length of time for which you must provide documentation depend on the lender.
Sources of No-Credit Home Loans
In the past, it would have been unusual if you could obtain a no-credit home loan from a large lender, such as a big bank or large mortgage company. They would simply not be willing to do the work involved for your approval.
Times are changing. FICO, the Fair Isaac Corporation that developed the FICO Credit Score, has developed the FICO Score XD, which uses alternative data sources. If the FICO Score XD is widely adopted, it could change the landscape for applicants for no-credit home loans. There are also large banks that are developing their own alternative credit scoring methods.
Other sources for no-credit home loans are smaller, local banks or credit unions. If you have a personal relationship with a lender, such as a small, hometown bank, it may be willing to do the manual underwriting that is necessary to process an alternative-data, no-credit home loan application.
The Federal Home Loan Administration (FHA) may be a good source of no-credit home loans. Housing and Urban Development (HUD) says that FHA cannot use a borrower’s lack of credit history as the sole reason for rejecting their mortgage loan application.
If you can show one year’s worth of on-time payments for such items as rent, utilities, insurance, and other fixed expenses, there is a good chance you can get an FHA home loan.
The Bottom Line
If you are a credit-invisible and want to obtain a no-credit home loan, you may have options. However, it's possible that you won't be able to get around a lender's request to see your credit history. You may have to wait until you establish credit to obtain a mortgage loan. If that's the case, you can apply for a basic credit card, keep your balance below 30% of your total credit limit, and pay it off on time every month. After six months, you may have built up enough credit to have a FICO score and apply for a mortgage loan.