When you apply for a mortgage, one of the first things that lenders will check is your credit score and credit history. But what if you haven’t established credit? This is known as having a nontraditional credit history, when you haven’t used credit cards or other types of loans. Since these are two of the primary ways that people build credit, this makes it more difficult to get your loan. Fortunately, there are still options out there for you.
1. Get Your Payment History onto Your Credit Report
Your history of paying bills on time, particularly your rent, can be used as proof of credit worthiness. Experian, which is one of the major credit reporting bureaus that assigns credit scores, will include payments made to your landlord as part of your credit history. The caveat is that your landlord must opt in to Experian’s system to report payments to them, and many landlords don’t do so, especially private landlords who only rent out a small number of properties.
To ensure that your payment information gets reported, you can ask your landlord to opt into the system. Wondering if your other bills can also help improve your credit score? Student loans can, so if you’ve been paying those for at least six months, you can expect it to have a positive effect on your credit. Cell phone bills and bills from utility companies may or may not factor into your score, depending on the provider – privacy laws in certain states result in many providers not reportig payments.
2. Get a Loan Through the Government
There are mortgages available with the backing of the Federal Housing Administration (FHA), and the U.S. Department of Housing and Urban Development has put rules in place for lending to people with nontraditional credit histories. There are several requirements if you want to qualify for an FHA-backed mortgage.
For the previous year, you can’t have any rental payment delinquencies on your record. You also can’t have more than one 30-day delinquency on any of your other bills, such as an auto loan payment or an electric bill. You can’t have had any accounts go to collections with the exception of medical-related incidents. Your debts can’t exceed 43 percent of your gross income, and that’s your debts with the potential mortgage payment included. After you put a down payment on your house and settle the mortgage costs, you must have enough money saved to cover one month’s expenses.
Keep in mind that qualifying for one of these loans doesn’t mean it will be a walk in the park to get one. Many mortgage lenders won’t work with you, because it’s more of a process to set the mortgage up.
3. Give a Small Lender a Try
There are more options out there for obtaining a mortgage than just the big banks. Shop around and look for online lenders, smaller banks, and independent mortgage brokers. You can often get more personal attention when you choose one of these smaller financial institutions, which can make the difference when you’re trying to get a mortgage with a nontraditional credit history.
You should also check out credit unions, which are gaining popularity on the mortgage market. In the five-year span from 2010 to 2015, credit unions nearly doubled the number of mortgages they originated, rising to 8 percent. Credit unions are an especially good option if you’re already a member at one. Not only do credit unions typically provide the personalized service of a smaller financial institution, but they may have flexible qualification criteria.
Moving Forward on Your Mortgage
It’s definitely not as simple to qualify for a mortgage when you have a nontraditional credit history. That doesn’t make it impossible, though, as an on-time payment history can boost your creditworthiness in the eyes of many lenders. If you don’t have much debt and have some money saved up to handle the costs of getting a mortgage, you can likely find a lender willing to work with you. Shop around so you can figure out what your options are.
If you are planning to apply for a mortgage in the near future but not right away, it’s a wise decision to start planning for that now. Are you renting? Ask your landlord and any other providers you pay regularly to report those payments so they will help your credit. Of course, you need to make sure that you make all your payments on time when you do this. You may even want to apply for a credit card, use it for small purchases, and pay your bill every month for an additional boost to your score. Every little bit helps and will put you in a better financial position.