Americans pay an average of $1,588 per month for an unfinished apartment. Many people feel intimidated when dealing with banks and that obtaining a mortgage to purchase a home is beyond their financial ability.

It doesn’t matter whether you are getting a mortgage for the first time or need to obtain a mortgage on your own following a divorce, understanding financing options is necessary to make the right decision for you.

Your credit score affects everything, including your ability to obtain a mortgage. Read on for information on your credit score and getting a mortgage without a credit score.

Your Credit Score

According to the U.S. Census Bureau and Department of Housing and Urban Development, in the United States, 1,021,000 new single-family homes sold during the month of March 2021. The average price of homes sold in March 2021 was $330,800

Unless you have a pile of money tucked under your mattress, you will need a mortgage to purchase a home of any size. Your credit score impacts that purchase.

Your credit score tells creditors how reliable you are at repaying debt. There are three credit bureaus (Experian, Equifax, and Transunion) that use credit-scoring models to provide you with a rating between 300 to 850. They measure your debt as follows:

  • 10% relates to your total debt
  • 10% relates to your new debt
  • 15% relates to how long you have been carrying debt
  • 30% relates to your debt level
  • 35% relates to your debt history

If you live debt-free, you may eventually establish a credit score of zero. This means you are invisible to credit bureaus or “unscorable.” 

In a world that revolves on credit card debt, car debt, and mortgage debt, how do you become unscorable? You pay off all your debt, never use a credit card, and never take out another line of credit. Over time your credit score will disappear.

A low credit score means you have made credit mistakes in the past and it leaves a negative impression of your ability to repay debt. A credit score below 500 may make it harder for you to obtain a mortgage than someone with no credit score.

If you have a low credit score the best thing to do is pay off all your debt, pay all bills on time, and wait for your credit score to disappear. If you have no credit rating you may be wondering how to establish credit.

How to Establish Credit

According to the Consumer Financial Protection Bureau, there are 26 million “credit Invisibles” in the United States. If you have never had any form of credit, such as a car loan or credit card, you are “credit invisible.”

This is different from those who have a prior credit rating but have not used credit for a few years. Being “credit unscorable” is due to a lack of sufficient information.

Where you fall in those categories is irrelevant. You can establish or re-activate a credit rating. If you never had a rating, it will take about six months. If you have gone invisible because of no credit activity, it will take 3-4 months.

A simple way to build a credit score is to activate a credit card. Every month make a small purchase and pay it off immediately.  This creates a positive credit history and increases your rating.

Here are ways to build your credit rating and increase your ability to secure a mortgage:

  • Obtain a gas or department store credit card
  • Apply for a secured credit card at your bank
  • Find a co-signer
  • Become an authorized user on another person’s credit card
  • Request your landlord and utility companies report your payment history to the credit bureaus
  • Make on-time payments every month
  • Use less than 30% of your available credit
  • Do not request too many credit cards at one time

Another option is to apply for a credit builder loan. This is a special loan with the specific purpose of building a credit score. The money you “borrow” is held by the bank in a special account.

You make loan payments to the bank, and once the loan is paid in full the money in the account is released to you. The bank reports to the credit bureau your timely payments and a paid-in-full loan.

Options for Getting a Mortgage

One of the first things you need to do when home shopping is to determine what size mortgage you can manage.

A bank rate mortgage calculator lets you take a look at how your down payment will affect your monthly costs, gives you an idea of interest, and more. That information is important because you want to apply for mortgages that are within your income level and more likely to receive approval.

Automated v Hands-on

Most lenders use an automated process for determining whether or not you qualify for a loan. If you do not have a credit score, you need to bypass this system by finding a lender who offers manual underwriting.

Lenders offering manual underwriting take a more personal look at your finances. To find this service you need to look at small institutions, including credit unions, and other specialty mortgage lenders who are able to offer you a wide range of mortgage options and in-house underwriting

Manual Underwriting

Manual underwriting means the potential lender takes a hands-on look at your ability to repay debt. You will need to provide documentation, such as proof of income, history of rental payments, and other support verification showing you are financially responsible. Requirements include:

  • Documental proof of at least 12-24 months of income
  • Steady payment history of a minimum of four months of rent
  • Payment history for utility bills, phone bills, insurance premium payments, and any other regular payments such as tuition or child-care
  • A down payment of 10-20%

The more information you are able to provide, the higher your chance of obtaining approval.

FHA Loans

Federal Housing Administration (FHA) loans are a mortgage option when you are unable to qualify for a conventional mortgage. FHA loans are backed by the government. You can receive this type of mortgage with no credit history and a 3% down payment.

The problem with this type of loan is that it has extra fees and mortgage insurance that increases your long-term costs. For example, on a $200,000 home, you can pay up to $30,000 more with an FHA loan than on a 15-year conventional mortgage.

Conventional Mortgage

If you have an acceptable credit score, you may be able to obtain a mortgage with a 3% down payment and an adequate debt-to-income ratio. The DTI ratio is the percentage of your monthly income that goes toward debt.

Lenders are likely to require a 10% down payment and DTI of no more than 36% plus proof of 12 months payments in your bank account.

Take the First Step

The first step to getting a mortgage without a credit score is to find out exactly where you stand. Contacting the Tammi Lindley Team using our online form or calling us (503) 517-8641 will get you on your way. We will provide you with the best insight and advice to move you in the right direction.

To get all your questions answered, we recommend scheduling a 30-minute telephone meeting. You will have our undivided attention for 30 minutes and will walk away knowing the necessary steps to obtain a mortgage. Don’t hesitate—Schedule Now!

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