How to Buy a House With No Credit

The housing market has been red hot for nearly three years. Despite a huge spike in interest rates since the end of 2022, there still seem to be too many buyers and too few properties for sale. If you're thinking about buying a house but don't have much of a credit history, you may wonder if it's possible. Here, we'll discuss ways to purchase a home even if your credit file is thin.

Can you get a mortgage with no credit?

The short answer is yes, you can get a mortgage with no credit. It takes more work, but it can be worth the effort.

Getting a mortgage with bad credit vs. getting a mortgage with no credit

The difference between getting a mortgage with bad credit vs. getting a mortgage with no credit is reputation. Your credit score is based on five criteria, each with a different value. For example, how long you've had credit (called "length of credit history") is worth 15% of your total credit score. How faithful you've been to paying bills on time (called "payment history") is 35% of your score. 

When you apply for credit, mortgage lenders want to know more about you -- specifically, how you have managed credit in the past. The fastest, easiest way for a lender to peek into your credit history is to check your credit report. If you have bad credit, it's likely because you didn't pay bills as promised. Your credit score is your financial reputation, and it's all lenders have to go on as they make a decision regarding your loan application. If an applicant with bad credit is granted a loan, it will be at a higher interest rate. Lenders view applicants with bad credit as a risk, and charging a higher interest rate helps mitigate the risk. 

When you have no credit history, lenders aren't sure what to think. You haven't built a financial reputation, and lenders have little upon which to base a decision. Qualifying for a mortgage with no credit is all about working with a lender that will allow you to prove your creditworthiness in a way that is less dependent on a credit score. 

How to get a mortgage with no credit

There are several ways to get a mortgage loan with no credit. One is to find a lender that will see beyond your credit score. Another is to look for mortgage options that don't rely as heavily on credit. And another is to build your credit history.

1. Understand underwriting

Lenders use underwriting to determine whether you are an acceptable credit risk and how likely you are to repay a mortgage loan. There are two types of underwriting: automated and manual.

Automated underwriting uses algorithms to determine your application's quality. The computer program flags your application if you don't meet the minimum credit score requirement. It recognizes a thin credit history, for example. It's as black-and-white as that. You either meet the lender's minimum standards, or you don't.

With manual underwriting, a real, live person studies your unique financial situation -- even if very little of your history is recorded with each credit bureau. Manual underwriters can take other information into account, such as your rent and utility payments, to evaluate your payment history.

2. Find the right loan and lender

Investigate all your mortgage options, which we'll cover below. Several of the government-backed loans cater to borrowers with limited credit, as they allow lenders to manually underwrite loans. 

If you want to land a conventional mortgage, you'll also need a lender that will manually underwrite your loan. Small lenders and credit unions are far more likely than large corporate lenders to employ manual underwriting. The only way to know for sure is to call lenders and ask about their underwriting process.

3. Establish an alternative payment history

As we discussed above, if you don't have a credit history, you need another way to show you'll repay your mortgage. That means not only paying all your bills on time but also documenting your alternative payment history.

Whatever loan you apply for, you'll likely need to show your loan officer everyday payments going back several years, such as your rent, utility bills, and car payments. Make sure to pay all bills on time and in full. Keep receipts in a file you can easily access. 

4. Save up a down payment

When it comes to how to buy a house with no credit, you might need to compensate by making a larger down payment. Squirrel away any extra money you can. Work out how much you can afford to save each month, and consider setting up an automatic transfer into your savings account. The more money you have for a down payment, the more favorably lenders will view your loan application. 

5. Consider a cosigner

One way to make up for your thin credit file could be to ask a friend or family member with strong credit to cosign with you. Lenders factor that person's credit score into their decision. But remember, if you ever miss a mortgage payment, your mortgage cosigner is on the hook for it. The loan also shows as a debt on their credit report. Do not ask anyone to cosign a loan unless you are convinced that you will never miss a payment. And be prepared to refinance your mortgage once you can qualify for a loan in your own right.

Mortgage options for no credit

If your credit report is thin to nonexistent, there are several mortgage options available.

Conventional mortgages 

As we've seen, you can snag a conventional mortgage with no credit, but it might be a long shot. You need to find a lender willing to consider an alternative payment history. Start with smaller mortgage lenders -- they may be more lenient, and the service is likely to be personalized.

You'll need to show you have a history of on-time payments, so you should support your application with receipts for things like car payments and rent. Be prepared to provide proof of income, and possibly also education. You'll likely need a low debt-to-income ratio (DTI) and solid down payment. The key to how to buy a house with no credit is to take every opportunity to show the lender you are a reliable applicant.

In a nutshell: It may be challenging to qualify for a conventional mortgage, but conventional mortgages offer the lowest mortgage interest rates and some of the most reasonable loan fees.

FHA loans 

FHA loans represent one way to get into a home of your own.. In their favor, FHA loans are government-backed and easier to qualify for than a conventional loan. As long as you have at least 3.5% down, there's a chance you will be eligible for an FHA loan. And the FHA has a procedure for applicants with no credit. As with other loans, you need an FHA lender willing to underwrite your loan manually, so you need proof of your everyday payments.

Keep in mind, FHA loans come with a fair amount of fees that you'll have to factor into the total cost of the home.

In a nutshell: FHA loans are flexible but can be fee-heavy. You may want to consider working with an FHA lender only if you plan to refinance your loan into a conventional loan once you've built a strong credit history.

VA loans 

If you're on active duty; are a military veteran, a reservist, or member of the National Guard; or are the surviving spouse of a deceased veteran, you will be hard-pressed to find a more liberal loan program than one backed by the Veterans Administration (VA). A VA-backed loan requires no specific credit score, so it's up to individual lenders to decide whether to approve you. Lenders can use an alternative payment history to approve VA loans. Unlike FHA loans, there are no down payment requirements, and you may land a decent interest rate.

In a nutshell: If you have access to a VA loan, compare it against a conventional lender to learn which one will cost less over the life of the loan.

USDA loans

It is possible to qualify for a USDA loan without a credit score, but, as with the other loans, it depends on the lender. USDA loans are designed to help low-income borrowers buy property in certain rural areas.

For applicants without a credit score, the USDA accepts a "non-traditional tradeline." Typically, it asks to see 12 months' worth of proof that you've paid other bills on time. Having several months' worth of housing payments in your bank account may also inspire USDA lenders to approve your loan.

In a nutshell: USDA mortgages -- designed for lower-income buyers in rural areas -- can be a good option for those just breaking into the housing market. 

How to build your credit score for a mortgage

As mentioned, mortgage rates have been on the rise since last year. If you're waiting for them to cool down a bit, now may be a good time to build your credit. If you'd like to build a credit score to qualify for a mortgage loan (or any other loan type), here are some ways to make it happen.

• Become an authorized user on someone else's credit card. Once your name is added as an authorized user, you get credit with the credit report agencies each time the card is paid on time.
• Take out a credit card with a cosigner. As mentioned above, it is serious business to ask someone to cosign, but if you make all payments on time, a credit card can quickly help you establish credit. Do yourself the favor of paying the card off in full each month. Not only will you establish credit, but you will accomplish it without going into high-interest debt. And each payment you make adds to your credit history.
• Open a secured credit card. Like "regular" credit cards, most secured credit cards report your payments to the credit bureaus, helping build your credit score. To open a secured card, you make a deposit. The amount you're allowed to charge is equal to the amount deposited. Look for a secured card with low fees, and make sure the card issuer reports to the credit reporting agencies.

Now we've covered all the steps in how to buy a house with no credit. It may not be easy, but we all have to start somewhere. Choose the mortgage type that works best for you, and you're on your way. Still have questions? For in-depth information on buying a home, check out our Home Buyer Checklist.

Still have questions?

Here are some other questions we've answered.

• How to Make an Offer on a House
• How to Get a Mortgage With Bad Credit
• My Spouse Has Bad Credit. Will We Get a Mortgage?