People who want to buy a home are always advised to get a mortgage pre-approval before they begin shopping for a home. If you do not have financing approved, there really is little point to look at homes; you do not know if you are going to be able to close the deal. Realtors and home-owners also will want to know that you are pre-approved for a home loan in that price range before they start to negotiate with you.
But what if you have limited, bad or even no credit? How can you get pre-approved for a no credit home loan in these circumstances? You may have more options than no credit check loans than you think.
Below are six easy ways to get that home loan pre-approval so you can start hunting for your dream house for real.
#1 Get a Loan Guaranteed by FHA
The home loans guaranteed by the Federal Housing Administration or FHA are the primary way that home buyers with bad, limited or no credit can get a home loan today. These loans are backed by FHA, so the finance company can lend money to a borrower with questionable credit, knowing that it will be reimbursed by the government in case you don’t pay.
A FHA insured mortgage can be obtained by a borrower with a credit score as low as 500. It is true that getting a home loan with a score that low is challenging, but it is possible. Your odds of getting approved increase substantially if you have a 580-credit score. Find out today’s FHA credit score requirements for a mortgage.
With that score, you will possibly be able to get a approved for a home loan with a 3.5% down payment. There are more options for bad-credit home financing if you can come up with a 5% down-payment.
FHA financing is available with 15 and 30-year terms, and fixed and adjustable rates are available. HUD Secretary Ben Carson and the President have confirmed that the FHA mortgage under Trump will thrive. Time will tell but naming Brian Montgomery to be in charge of FHA is a great start.
#2 Get Your Compensating Factors in Order
What do we mean by compensating factors? Let’s say that you have a credit score in the low 500’s and are having trouble even getting qualified for a FHA loan. If you have some other stronger financial factors in your favor, the lender, broker or bank may consider giving you a pre-approval letter for a mortgage. Some of the compensating factors that you can try for include:
- A more significant down payment (10% or more)
- Lower debt to income ratio (pay down the balances of your credit cards!)
- Higher than average income
- No major debts
- Document savings (Show proof of notable cash reserves)
- Stable employment history (several years with the same employer)
- Currently paying about the same rent payment as proposed mortgage payment
It also is very helpful if you can show, despite poor credit, that you have been paying your bills on time for the last year or more. Lenders, especially FHA-approved companies, expect to see people with past credit problems. They were common during the financial crash, and not always in the control of the borrower. People lost jobs, lost hours, savings often evaporated, and people’s credit scores took a beating.
But you can overcome that bad credit somewhat if you can show you are back on your feet financially in the last one to two years. No late payments on anything, ideally, and no accounts sent to collections are what to aim for.
#3 Reduce Your Debts as Much as You Can
It is helpful to have as little credit card debt especially if you are trying to get pre-approved with bad credit. Once you have paid off most or all of your credit cards, your credit score should raise dramatically by 30 points or more. By having less unsecured debt in your name, you will look like less of a risk to the lender, making a no credit home loan more possible.
#4 Consider a Car Loan
We know. It might sound strange to consider getting a car loan; after all, this is another form of debt, right? Right, but a car loan is a secured, installment loan. It is paid for a certain number of months at a certain amount, and it is secured by a piece of property – the vehicle. If you can show a lender that you are making car payments on time for a year or more, it may help you to get a mortgage pre-approval with poor credit or limited credit.
That brings us to another point: In some ways, it may be harder to get a pre-approval for a mortgage with no credit at all than bad credit. If you are not using your credit at all, there is no way that a lender can make a judgment about the level of risk of extending you a qualification letter for a mortgage, rather than a no credit check loan with a higher interest rate.
That is why it is very useful for someone with bad or limited credit to get a car loan and make payments faithfully. This will indicate that you are able to make an installment loan on time, which can show that you may be an acceptable risk for a home loan. This will help you be more eligible for a mortgage, rather than a no credit home loan.
#5 Become an Authorized User on a Credit Card
If your credit is bad or non-existent, you can raise your score and establish credit by being added as an authorized user on a credit card with a person with good credit. Make sure that the person has good credit and makes payments on time. Discover cards are good options for establishing credit as an authorized user.
#6 Get a Secured Credit Card
If your credit is too poor to get a regular credit card, you can get a secured credit card. This is where you pay a certain amount to the card’s account so that you have a certain ‘credit line’ on the card. You then use the card like a regular credit card. Secured credit cards report payments to the credit bureaus, so this is a way to build credit as well.
References: How to Get a Mortgage with No Credit (n.d.). Retrieved from https://www.realtor.com/advice/finance/get-mortgage-little-no-credit-history/