For many homebuyers, establishing credit came naturally once
they began working, applied for a credit card, car loan or paid
back student loans. But what about potential homebuyers who don't
have a
credit score
either because they are credit card averse or have yet to build up
a substantive credit history -- can they still apply for a
mortgage?
The answer is "yes," but "it's exceedingly difficult to obtain a
mortgage without a credit score," says Tim Ross, president and CEO
of Ross Mortgage Corp. in Royal Oak, Mich. "Lenders use automated
underwriting systems that base a loan decision on certain criteria
including a credit score. But there are some non-traditional
sources that can be used for credit verification."
Mortgage lenders typically require a credit score of at least
620 or 640 to even consider an applicant for a loan.
Whether you prefer not to use credit cards, are new to this
country or are simply a younger borrower who hasn't built up enough
credit history, there are some alternative sources mortgage lenders
can use to determine your credit risk.
While most lenders require three or more sources of credit,
Clint Madison, a senior mortgage banker with Envoy Mortgage in
Walnut Creek, Calif., says, "I've worked with borrowers who have a
slim credit file and been able to get them approved for a loan. The
first thing we look for would be 12 to 24 months of cancelled
checks or verification from a landlord of
on-time rent payments
."
Alternative sources of credit
Here are several other items that can be used for
non-traditional credit verification, according to Ross:
- Utility bills for gas, electricity or water as long as they
are paid separately from your monthly rent
- Phone and cable bills
-
Car insurance
, renter's insurance, life insurance payments or medical
insurance payments if they are not paid by payroll deduction
- Child care or school tuition payments
The more evidence you can provide that indicates a history of
on-time payments the greater your chances of qualifying.
"You need at least 12 months and sometimes as many as 24 months
of payments to prove your creditworthiness," says Ross. "A bigger
down payment offsets your credit risk and so does your job
stability, your cash reserves and a high income in relation to your
debts."
Credit history matters
The reason for your lack of credit history will also impact your
ability to qualify for a loan.
"If you're living with your parents and have yet to establish
any credit, it's pretty much impossible to get a loan unless your
parents are willing to co-sign for you," says Madison. "The parents
will need a credit score at a minimum of 660 and you'll need to
have at least two months or maybe as much as six months of
principal, interest, taxes and insurance payments in cash reserves
in the bank."
Borrowers who are new to the U.S.
may have a credit report from another country. Ross says those
credit reports can be used to create a record of bill payments for
a loan application.
You may not know your true credit score
Even consumers who have a long enough credit history to produce
a score still need alternative sources of credit when applying for
a loan. The Consumer Financial Protection Bureau (CFPB) recently
released a study that showed there are discrepancies between the
credit score given to a consumer and one reported to a lender.
"This study highlights the complexities consumers face in the
credit scoring market," said CFPB Director Richard Cordray in a
press release. "When consumers buy a credit score, they should be
aware that a lender may be using a very different score in making a
credit decision."
The problem, says Madison, is that borrowers are set up for
false expectations.
"They may either be expecting to qualify for a better rate than
they do, or they may lose out on opportunities for which they don't
believe they will qualify, when, in reality, they can," says
Madison. This is why having alternative sources of credit -- that
can help prove your ability to repay a loan -- is important.
Establishing credit
Ross says it takes just six months of credit card usage to
generate a credit score, but lenders would also need other sources
of credit in addition to your six-month-old score.
"Using alternative credit doesn't change someone's credit score,
so if your score is low, all you can do is let time pass while you
do the right thing over and over again," says Madison.
It's especially important that prospective buyers with thin
credit consult with a mortgage lender, says Ross. They can provide
you with "a road map to follow to improve your chances of
qualifying for a mortgage."