Was Dave Ramsey lying when he said you can get a mortgage without a credit score/credit history?
The man doesn’t originate mortgages for a living, but he is correct. Minus the fine print that comes with such an application.
I’ve been meaning to write about this for a while now. An email I received recently asking for help finally got me motivated to get the word out there.
Here is exactly how complicated getting a mortgage without a credit score can get – especially when the wrong loan officer is working your file.
Couple decides to buy their first home.
Husband has never used credit, so he doesn’t have a credit history or a credit score. Wife has a very good credit score. Together they saved up for a down payment, and then some.
Wife’s parents reassure them that a mortgage can be taken out without a credit score. They talk to a loan officer and he prequalifies them. Shortly after, they have a home under contract, and an FHA loan application ongoing.
Everything is going great.. Until they have some delays and miss their financing and appraisal deadline. Cherry on top: a few days prior to the scheduled closing, the loan officer finally gets the memo that because the husband has no credit history, their debt to income has stricter limitations. Our couple no longer meets the guidelines. Prior to closing!
The parents offer to co-sign to save the day, so everything should be good, right?
Yet another FHA guideline says that when using non-traditional credit, the borrower(s) must qualify on their own, so non-occupant co-borrower income is of no help.
Terminate the purchase contract and lose the earnest money and the roughly $500 up front appraisal fee.
Come up with a 25% down payment to lower the loan amount and meet debt to income guidelines
Add an occupying co-borrower, so his/her income can be used to qualify.
Our couple went with the third option, and were told they could get a loan in just their names in 6 months or so.
The loan officer fell short once again on knowing the guidelines.
In order to do an FHA rate and term refinance, they need to have owned the home for at least 12 months, or they are limited to 85% loan to value (meaning they need to have 15% equity to do the refinance earlier!).
They could technically do a credit qualifying FHA Streamline refinance, since the husband would start having a credit score once 6 months pass. The problem is, an FHA streamline requires that the borrower receives a net tangible benefit from doing it.
This net tangible benefit can be:
A reduction of at least 0.5% in the interest rate
An ARM (Adjustable Rate Mortgage) loan being replaced by a fixed rate – only if there are 15 months or less before the rate adjusts next, and only if the new rate does not exceed the old by more than 2%
A reduction in loan term, such as going from a 30 year fixed to a 20 year fixed – as long as the new interest rate does not exceed the old AND the new mortgage payment does not exceed the old by more than $50 (mortgage payment here includes: principal, interest and FHA mortgage insurance).
Talk about tricky, and highly unlikely in a mortgage environment where interest rates have nowhere to go but up.
In case you are wondering, an FHA cash-out refinance is out of the question – there isn’t enough equity in the home. Also, cash-out refinances are only permitted on owner occupied principal residences with a 12 month ownership history and maximum 85% loan to value (again, the 15% equity requirement). An exception to this would be if the home ownership is a result of an inheritance.
Back to our story. How does one go about removing the co-borrower that was added…?
A refinance into a Conventional loan is the only way to go at this point.
There needs to be at least 5% equity in the home (the minimum down payment for a Conventional loan), so additional money most likely needs to be applied towards lowering the principal balance of the loan.
Keep in mind that this couple already paid a 1.75% up front FHA Mortgage Insurance Fee. This was rolled into their loan amount, and it is non-refundable. So if we look strictly at equity, they only made a 1.75% down payment on their FHA loan.
What is there to learn from this?
I’m absolutely not implying you should go out and get credit cards just to build a credit score.
If you’re doing fine without them, by all means, keep it up. You are likely more “financially healthy” then most.But realize that there are specific obstacles in choosing this path, and be prepared to tackle them.
Do your homework as much as possible. Whenever your situation is a bit more uncommon, you need to be a lot more hands on. Don’t just listen to other people and assume they are up to date with industry requirements.
Choose your loan officer carefully. Asking lots of questions will help you assess the level of communication you will get throughout the transaction. That’s right, the level of communication, not the level of knowledge. Loan officers are sales people – lots of them aren’t very good at actually originating mortgages – that’s what the processors do. But they are good at selling you on working with them. Your best chance to expose them is to push them and take just a little too much of their “selling” time.
Stay on top of things. Watch your purchase contract deadlines. Make sure you have a solid approval prior to the financing deadline, and your appraisal report is back prior to the appraisal deadline. If not, make sure you know exactly what the issue is, and what solutions are available. Various issues always come up, and while a good loan officer will keep you updated, it never hurts to be on the safe side.
Fortunately, this story didn’t end up with the borrowers losing their earnest money and their dream home. Other people might not have been so lucky.
If you’re planning on applying for a mortgage loan and you have no credit score, here is what you need to know.
People don’t have a credit score for one of two reasons:
There is no credit history to generate a credit score, meaning no credit accounts were ever opened in this person’s name. Careful here not to have delinquent accounts reporting (such as collections, and especially if they exceed $2,000 in total), because that can result in a poor credit score – even if you never took out a credit card.
There is not enough recent credit history. This happens when all your credit accounts have been closed, and are now too old to be used to generate a credit score. 6 months of reported payments is all it takes to start a credit score back up.
If this describes you, an FHA loan is what you need to apply for.
FHA guidelines allow non-traditional credit sources to be used in order to assess a borrower’s creditworthiness. This means that the underwriter will build a credit profile for you using your payment history on accounts that don’t normally report to the credit bureaus.
At least one borrower on the application must have a credit score, and the maximum debt to income allowed is 31/43 – where 31% is your new mortgage payment, and 43% is your total debt.
This percentage is considered out of your total stable gross income; for example: overtime without at least a 1 year history of being received and that is unlikely to continue is not considered stable for the purpose of obtaining a mortgage.
The payment history has to include 3 account references, out of which at least one has to be from the list below:
Rental housing payments(at least 12 months of on-time payments are needed)
Utility Company Reference (gas, electricity, water, television service or internet service)
If not all 3 of the above can be documented, then positive payment histories from other sources can be used, such as:
Insurance premiums that are not automatically deducted from paychecks (medical, auto, life, renter’s insurance etc)
Payments to child care providers (must be a business, not a private person)
Retail store credit cards that do not normally report to the credit bureaus
Rent to own agreement payments
Recurring medical bill payments not covered by insurance
Documented 12-month history of savings evidenced by regular deposits resulting in an increased balance to the account. Deposits must have been made at least quarterly, may not be payroll deducted, and may not have caused insufficient funds (NSF) checks
A personal loan with repayment terms in writing and canceled checks to prove those payments
A 12 month history of payments made by the borrower on an account where he/she is an authorized user.
If it sounds a bit complicated, let me make it easier.
With all the subscription plans going around for everything, you could use your Netflix payment history, Audible.com monthly plan subscription or Dollar Shave Club. Just make sure you’ve been paying monthly, not every couple of months or so. Your gym subscription is also great to use if it’s a month to month.
*Be very aware of some of the pitfalls of joint accounts, because you won’t necessarily be able to use them.
A recently married young couple applied for a mortgage with me last year.
She was a great little saver, but had no credit history. They still had separate bank accounts at that point. The rental agreement was in both their names, but the utilities were in his, just like the wireless phone agreement and auto insurance.
I wasn’t able to use any of these accounts to build a positive payment history for her because all the payments came out of his bank account only. Nothing was just in her name. He was also the one making the actual rent payment, which further complicated things on my end.
A careful review of her bank statements showed she was making regular monthly transfers to the husband’s account for her share of rent and utilities, so her most recent 12 months of bank statements went into underwriting.
The same bank statements showed her consistently depositing money in her savings account, with a single brief balance drop of $4,000 for a used car that she paid cash for. This pattern of savings also counted as a positive payment history -even if the payment history was to herself.
Our third and last documented payment history came from her gym subscription, where she had been going monthly for the past year. Talk about benefits of being active!
This couple earned very good money, saved a bunch and spent a lot less then they made – and yet they were close to not meeting the documentation requirement.
Things to get out of this?
Make sure your name is on the rental agreement, and your on-time part of the rent payment can easily be documented by checks or recurring transfers.
Put only your name on some of the utility bills, even if you have to make that initial security deposit because of it.
Stay organized – when paying by check, write the purpose of the payment in the check memo. It will be a lot easier to prove what the money was for. There is already a lot of documentation that will be required, so don’t complicate things further.
Not having a credit history won’t prevent you from getting a mortgage loan. What will prevent you is:
not being properly prepared
working with a loan officer that has no idea what they’re doing.
Save yourself the headache.
If you have a non-traditional credit loan scenario for a Utah purchase, contact me to discuss the details. Call me at (801) 473-3154 or email me at firstname.lastname@example.org
Even better, apply online now.