Trying to buy a home with bad credit is hard. But what about trying to buy a home with no credit at all?
There's a name for these people: "credit invisibles." It means they don't have a credit report or score on file with the three major credit bureaus (Equifax, Experian, and TransUnion), usually because they don't have a traditional credit trail such as a credit card or college loan. Far from being anomalies lurking on the fringes of society, credit invisibles are shockingly common.
According to a recent report by the Consumer Financial Protection Bureau, roughly 45 million Americans are characterized as credit invisible. Meanwhile, 19.4 million are known by another equally ominous label: "credit unscorable." That means they have some credit history, but not enough to generate a score. For example, they might have had credit cards or loans at one point but then stopped, usually due to financial difficulties.
Typically, invisibles and unscorables face a tough road if they want to buy a home, because mortgage lenders are reluctant to fork over money to individuals with no traditional track record of paying back debts. But hope has arrived for these credit-challenged folks: A growing number of lenders are using alternative credit-scoring methods to assess a home buyer's creditworthiness for a home loan—which means that many who have been shut out of the home-buying game so far might now have a shot.
Traditional vs. alternative credit scores
Not surprisingly, people without credit scores on file at the main three bureaus—which factor in data about credit cards and college and auto loans—typically have low incomes and, as a result, often lack the means to purchase property. Almost 30% of consumers in low-income neighborhoods are credit invisible, and an additional 15% are unscorable.
And yet the Federal National Mortgage Association (known as Fannie Mae) estimates that 5 million renters without credit scores can nonetheless afford to buy real estate. Moreover, a recent LexisNexis survey found that 81% of consumers who are unscorable using traditional credit bureau methods are scorable using alternative data. Depending on the lender, that alternative credit data can include the following:
- Rent payments
- Cellphone bills
- Utility bills
- Insurance that’s paid monthly or quarterly
- School tuition
- Child care
- Union dues
- Regular savings deposits
- Regular contributions to a payroll savings or stock purchase plan
Typically, these mortgage lenders require borrowers to have at least four alternative credit trade lines—meaning you’ll need to show proof of on-time payment history in these areas. If you do, you could qualify for a mortgage without a traditional credit score or report.
Why alternative credit scores are catching on
One reason more lenders are using alternative credit scoring is because the Fair Isaac Corp., creator of the widely used FICO credit score, recently introduced the FICO Score XD, a credit-scoring method that’s based on alternative data sources such as cellphone and cable payments. FICO created this score to “give issuers a second opportunity to assess otherwise unscorable consumers,” its website says.
Meanwhile, the three main credit-reporting agencies have begun broadening their scoring methods for lenders as well. In particular, their VantageScore system includes rent and utility payments.
Furthermore, some mortgage lenders have created their own alternative credit-scoring models to assess home buyers. PNC Mortgage, for example, will look at monthly payment obligations that don’t necessarily show up on a person’s credit report, says Staci Titsworth, a regional manager at PNC Mortgage in Pittsburgh.
But there are often caveats to this new approach. With PNC, for instance, the bank will establish credit history using alternative sources only for borrowers who are applying for an FHA loan. Yet some mortgage lenders—like smaller banks and credit unions—will use nontraditional credit-scoring methods for conventional loan borrowers as well.
How to get a mortgage with no credit
Bottom line: Qualifying for a home loan when you have little or no credit history can be difficult, but it's doable today.
“The borrower has to dig up a lot of documentation,” says Titsworth. For on-time payment verification, most mortgage lenders will ask you to provide a letter from each creditor on official letterhead showing your name, account number, and information stating your account has been "paid as agreed for the last 12 months."
Freddie Mac, however, requires lenders to directly verify timely payments using canceled checks, receipts, or written verification from a professional property manager.
And while these home buyers might have to shop around for the right lender, that process could become easier in the next few years if this approach becomes more popular. Your best bet is to shop online for lenders or meet with a mortgage broker, who can assess your credit situation and help you find a lender who'll play ball.