Most people who apply for a home loan have a credit history that they built over a period of years by making loan and credit card payments. Some borrowers, however, have little or no credit history. If you fall into the second category, you may still be able to qualify for a mortgage, but it may be challenging.
What Does It Mean to Have Little or No Credit?
If you have one or more credit cards, or an auto, student or personal loan, the company or companies that issued credit to you report information on your payments to the credit bureaus (Equifax, Experian and TransUnion). That information is used to build your credit history and impacts your credit scores.
It takes time to build a credit history. If you haven’t had a credit card or loan in the past, or if you only opened an account recently, it will be difficult for a mortgage lender to evaluate your creditworthiness and decide whether to give you a home loan, as it won’t have much, or any, data to use to make an informed decision.
Having a limited or nonexistent credit history is not the same as having bad credit. If you have a low credit score, that means that you have a history of making late payments or failing to make payments at all. You may also have a low credit score if you used a large percentage of your available credit to make purchases and have a high credit utilization ratio.
How You Can Qualify for a Mortgage
Some lenders, especially those that are government-backed, sometimes approve mortgages for applicants with little or no credit history. If you find a lender that considers nontraditional credit, it will look at whether you have a history of making timely payments to your landlord, utility companies and insurance company. You will have to provide documentation showing your income for at least the past 12 months, as well as records showing that you made multiple types of payments on time for a period of several months, to qualify for a loan.
Each lender has its own requirements. Some lenders won’t approve a mortgage based on nontraditional credit, so you may have to do some research to find a company willing to work with you.
How to Build a Credit History
If you don’t want to buy a house right away, you have time to establish a credit history before you start shopping for a mortgage. That can give you a larger pool of lenders to choose from and may make the process of getting a home loan simpler.
You can look for a credit card designed for people with little or no credit history, such as a secured card, or ask a family member or friend to add you to a credit card account as an authorized user. You may also be able to take out a loan designed for people seeking to establish a credit history.