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How to get a mortgage without a credit history

Credit-invisible consumers still have access to mortgage products.
3/14/2017 10:54:21 AM

No one wants to be in debt. After seeing the fallout from the Great Recession, or watching parents or friends feel overwhelmed with loans or payments, it's reasonable that many people would avoid it.

If you're someone who has chosen to live a debt-free life, making purchases in cash and avoiding credit cards, you're not alone. In fact, you're probably one of the approximately 26 million Americans who are considered "credit invisible," according to the Consumer Financial Protection Bureau.

There are some perks to living debt-free, but there are a few disadvantages to it as well. Creditors like to see that you have taken on and responsibly managed debt in the past before agreeing to lend you money. This is especially true for conventional mortgage lenders.

A good track record shows that you know how to handle regular payments and manage your money. Lack of credit history might mean you are responsible, but it's not a guarantee, and lenders know this. As such, many creditors are hesitant to grant a mortgage to someone without a credit history. However, that doesn't mean those credit-free individuals are out of luck.

Check out alternative mortgage products

There are many different types of mortgage products available to consumers, each with its own unique characteristics. The Federal Housing Administration mortgage is an attractive option for many first-time homebuyers because it has minimal down payment requirements and low interest rates. Another feature of the FHA loan is that lenders cannot turn away a prospective borrower simply for lack of credit history, according to FHA.com.

Other mortgage options for the no-credit borrower include the USDA Rural Development loan and VA loan. To be eligible for a USDA loan, you need to be looking to buy a home in a qualifying location. This makes it sound like most locales aren't eligible, but just the opposite is true: 97 percent of the U.S. qualifies for USDA loans.

To be eligible for a VA loan, you must be a member of the armed forces, or a spouse of a veteran or active-duty service person.

Build your credit

If you're planning on buying a home within a few years from now, you have time to build up your credit. While taking on some debt might sound scary, there are smart ways to do it. Take out a credit card, and only use it for utilities or rent payments. These will be more or less the same for each payment cycle, and you already know you can pay them off in full on a monthly basis.

If you're not keen on taking out a credit card, you can still build a payment history, NerdWallet explained. A payment history is sort of like a credit history, though it's not as easy for creditors to work with. Still, it'll do in a pinch.

Lenders can access a credit history through one or more of the three major credit bureaus. It comes packaged in a neat credit report. A payment history is a little bit more do-it-yourself. Ask your landlord or service to begin reporting your on-time payments to Experian.

If you have student loans, these can help build your credit history, too. Make about six months of on-time payments and you should be in good shape.

The key to building a credit or payment history is paying in full and on time as much as possible. This trend will show your future mortgage lender that you can responsibly handle debt and that you're a trustworthy borrower.

Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.