Before giving you mortgage money, lenders want to make sure that you have a history of paying your bills on time. Your three-digit credit score may list the numbers, but for homebuyers who lack an established credit history, it doesn't reveal the whole story about your financial responsibility. If you don't have credit cards, car payments, student loan bills or mortgage payments already, you won't have a deep enough credit history for lenders to determine whether you're likely to make home-loan payments on time. Fortunately, you can get around a lack of credit history by proving you're so financially healthy that you won't struggle to make your mortgage payments.
Provide mortgage lenders with documents that prove that though you don't have traditional credit, you have paid your bills on time in the past. Send your lender copies of your most recent utility bills to show that you've always paid them on time. You can also send letters from current and past landlords stating that you never paid your apartment rents late. The credit bureaus don't track these payments when determining your credit history, but they do offer proof that you've been financially responsible in the past.
Send your lender copies of the financial documents that prove that you have high enough monthly income and low enough monthly debts to afford a mortgage payment. Typically, lenders want your total monthly debts -- including your new mortgage loan payments -- to equal no more than 36 percent of your gross monthly income -- your income before taxes are taken out. If you can show lenders that your income is below this ratio, they will be more likely to overlook your short or nonexistent credit history.
Send your lender a letter written by your current employer that states your position, how long you've worked at the company and your salary. Lenders look favorably on borrowers who have worked at the same company or in the same industry for two years or longer. This may give your lender enough confidence to approve your request for a home loan, even though you don't have an established credit history.
Offer to put down a large down payment, say 20 percent. The more money you put down, the more invested you become in your new home. Lenders consider borrowers who've already invested a significant sum of money in their homes to be less likely to default on their mortgage payments.
Find someone with a strong credit history to cosign your mortgage loan if lenders are still balking at lending to you. A cosigner provides security to lenders; if you default on your payments, your lender can seek financial relief from your cosigner. Make sure, though, that any cosigners understand that they'll be financially responsible -- and their credit score can fall -- if you fail to make your mortgage payments.
- Bankrate: Debt-to-Income Ratio as Important as Credit Score
- myFICO.com: What's in My FICO Score
- Federal Housing Administration. "Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund," Page 52. Accessed April 10, 2020.
- My Fico. "Loan Savings Calculator." Accessed 10, 2020.
- Fannie Mae. "Underwriting Factors and Documentation for a Self-Employed Borrower." Accessed April 10, 2020.
- Internal Revenue Service. "Form 4506-T: Request for Transcript of Tax Return," Page 1 - 2. Accessed April 10, 2020.
- Internal Revenue Service. "Form 8821: Tax Information Authorization," Page 1 Accessed April 10, 2020.
- Internal Revenue Service. "Form 4506: Request for Copy of Tax Return," Page 1 - 2 Accessed April 10, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.