Your credit history is a major factor that lenders consider when deciding whether to approve you for a home loan. Before they lend you a large sum, lenders want to see how reliable you’ve been in repaying your loans and handling your finances.
But what happens if you want to buy a home but have little or no credit history?
Do You Need Credit To Buy a House?
It’s possible to buy a home with no credit, but the loan options available to you will be limited.
What Is Credit?
Credit is the ability to borrow money and pay it back later. When you buy something with a credit card, you’re using your credit to take it home now and pay your credit card company for it down the line.
If you use credit responsibly and make your payments on time, you can build up a credit history that shows you’re a reliable borrower. However, if you miss payments and accumulate debts, lenders will be reluctant to let you borrow money. And when they do, it will be more expensive for you to borrow.
Your credit history shows how you’ve managed your credit and debts. Lenders use this information to determine how much risk you pose as a borrower. If you have yet to build up credit, you possess what is known as a “thin credit file,” which makes it harder for the lender to assess the amount of risk it will be taking on by lending you money.
Your credit report is a record of your credit activity and history. Credit bureaus and credit reporting agencies collect data about you from your creditors and other companies, such as your cellphone provider, that you pay regularly.
Your credit score is a three-digit number ranging from 300 to 800 that is calculated using a scoring model based on the information in your credit report. Your credit score is used by lenders to gauge how likely you’ll be to pay back your loan on time.
Lenders typically use the following ranges to classify credit scores:
- Poor: 300-579.
- Fair: 580-669.
- Good: 670-739.
- Very good: 740-799.
- Excellent: 800-850.
How is your credit score calculated?
The exact algorithm used to determine your credit score varies by credit bureau, which means your credit score can vary slightly. FICO scores are used by 90% of top lenders, and are calculated using the following factors:
- Payment history: 35%.
- Amounts owed: 30%.
- Length of credit history: 15%.
- New credit: 10%.
- Credit mix: 10%.
How can I improve my credit?
If your credit score isn’t so great, there are steps you can take to make it better. While it may take some time to see positive moves reflected in your credit score, improving it can save you money on a mortgage.
Here are some ways to boost your credit score:
- Pay your bills on time.
- Catch up on past-due bills.
- Pay down debts.
- Keep existing credit lines open.
- Avoid opening new lines of credit.
Ways To Buy a House With No Credit
While there are multiple eligibility requirements to consider, it’s possible to get a mortgage with no credit.
- Conventional loans, with a down payment of at least 10%.
- Federal Housing Administration loans, known as FHA loans.
- Veterans Affairs loans, known as VA loans.
- Department of Agriculture loans, known as USDA loans.
Loans with low credit score requirements
If you’ve built some credit but your credit score is fairly low, it’s still possible to get a home loan.
FHA loans are designed to help borrowers with low credit scores buy homes. Various state and local government and nonprofit organizations in your area also may offer programs for homeowners with less-than-ideal credit histories.
Pros and Cons of Buying a House With No Credit
Some of the advantages of buying a house with no credit are:
- You get to buy a home sooner.
- You can avoid taking on additional debt beyond your mortgage.
Some of the downsides of buying a house with no credit are:
- Your loan options are limited.
- You likely will pay a higher interest rate.
- Your mortgage will cost more.