You need good credit to get a mortgage, but what happens if you don’t have any credit? It’s not a bad thing to not be in debt, but lenders also don’t have anything to use for their decision. How do they know how you handle your finances without a history of your payment habits?
Some lenders allow the use of non-traditional credit or non-traditional trade lines. Everyone pays some type of bills in their life. That’s exactly what non-traditional trade lines are – proof of your payments. Think of the bills you pay – utilities, rent, cell phones, tuition, and insurance, as a few examples. You pay these bills every month. They serve the same purpose as traditional trade lines. The only difference is they don’t report to the credit bureaus.
How do you use these trade lines to get a mortgage? Keep reading to find out.
Gather at Least Three Trade lines
Most lenders need you to have at least three non-traditional trade lines to qualify for a mortgage. You will need official proof of the payments to these trade lines too. If you have canceled checks or statements from your payments via debit card, gather them. You’ll likely need to prove your payments for the last 12 – 24 months.
If you can, choose three different types of accounts. For example, rent, one utility, and one insurance payment show that you can manage a variety of types of bills. If you don’t have three different types, don’t worry; just make sure you have at least three trade lines.
Have Compensating Factors
Lenders look at the big picture when they qualify you for a loan. Even though you don’t have traditional credit, they may give you a loan. You have to give them a reason to do so, though. For example, a borrower that has non-traditional trade lines, a new job, and no liquid reserves isn’t a good risk.
A borrower with non-traditional credit, the same job for the last 10 years, and 6 months of reserves on hand, is a good risk. Lenders will likely lend to the latter borrower because of the lower risk he or she poses. It’s not all about the credit score; instead, it’s about the likelihood of you making your payments on time.
Choose a Loan Type
Government-backed loans are the most common type of loan for borrowers with non-traditional credit. FHA loans, for example, allow the use of non-traditional credit. To use it, you must have proof of housing payments (such as rent) as well as a few other accounts. You can’t have more than one 30-day late payment within the last 12 months on any account. You also can’t have any collections or judgments.
FHA loans have lenient guidelines in addition to the use of other credit sources including:
- Your housing payment can use up to 31% of your gross monthly income
- Your total debts can use up to 41% of your gross monthly income
- You must have stable income/employment for the last 12 – 24 months
- You must have at least 3.5% of the sale price of the home to put down
If you can’t qualify for an FHA loan, consider subprime loans. Alternative lenders that keep the loans on their books offer solutions. These lenders may be able to work around your lack of credit as long as you have other compensating factors. A few examples include cash reserves on hand, a large down payment, or a solid employment history.
Each lender has different guidelines on non-traditional credit. Shop around to find the lender that will accept your situation. In fact, try to find at least three lenders that will pre-approve your loan. This way you have enough quotes to compare to one another. This way you aren’t taking the first loan that a lender will give you. Instead, you choose the loan that will help you make the smartest financial choice.
Getting a mortgage with non-traditional trade lines is possible; it just requires a little more work. Find lenders that accept no credit scores and see what other requirements they have. With a little research, you should be able to find yourself a lender that will give you a loan if you have solid qualifying factors.