How To Buy Your First Home Without A Credit Score

Qualifying for a mortgage without a credit score is not as hard as it was in the past. As many mortgage lenders start to loosen their approval guidelines, the two government-sponsored agencies, Fannie Mae and Freddie Mac, are now in agreement by allowing borrowers with thin or no credit to qualify for a mortgage.

A Closer Look at Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are the two mortgage agencies that buy most conventional loans from lenders. Since the two companies buy the bulk of mortgage loans from banks and mortgage lenders, the lenders will underwrite a borrower’s application according to the two agencies guidelines.

In June of 2017, Freddie Mac began allowing mortgage approvals for borrowers without a traditional credit history or score. To determine a borrower’s ability to repay a mortgage, Freddie Mac now allows lenders to review such items as rent payments and utility bills. In the past, Fannie Mae and Freddie Mac did not consider nontraditional credit histories such as utility bills.

“No Score” Mortgages

Borrowers must meet certain criteria before they qualify for a “no score mortgage”. First, the mortgage must be for a purchase or refinance transaction. Next, all borrowers assigned to the mortgage must use the property as their primary residence. Additionally, borrowers must have a minimum down payment of five percent, and a minimum of one borrower must have a payment history for housing, such as rent.

The FHA and First-Time Homebuyers

For consumers who do not want to obtain consumer debt to build a FICO score, mortgage lenders will now turn to older methods such as manual underwriting to determine a potential borrower’s credit risk. Additionally, the Federal Housing Administration also instructs lenders to use manual underwriting techniques to qualify borrowers without traditional credit histories or scores.

The FHA specializes in working with first-time homebuyers, especially those with thin credit histories or no credit histories at all. The FHA encourages its lenders to avoid using automated underwriting for first-time homebuyers with no FICO score. Many new homebuyers have limited credit histories and often find it difficult to build credit since they have limited access to credit lines. Therefore, the FHA asks all its lenders to look at a potential borrower’s entire income profile and not base their decisions solely on credit scores.
If mortgage applicants did not have a credit score in the past, it was much more difficult to qualify for a mortgage. Today, many banks are starting to open up their mortgage lending practices by approving borrowers without traditional credit using manual underwriting techniques.