Buying a home without any credit but good history

Question

I'm in the process of looking at condos/town houses to buy. Based on the location, I know that I will be there at least 5 years.

I am young, and have used cash and debit cards all throughout my life, and so this is the biggest difficulty. The location where I'm moving, it makes financial sense to buy in one sense because the typical rental is 300$ more than my estimated mortgage would be, plus I know I'll be there 5+ years. My current salary is 95k, I have 50k saved for down payment but this increases 4K every month until I buy a home (estimated between 2-4 months). The homes I'm looking at are sweat Equity homes around 340k.

Back to the problems. I have zero debt, college education, rented for 5 years. I don't have any credit scores. Every lender I have talked to (around 5) act like I am some disease cause I don't have a score ("Oh wow!, you need to fix that"). I bank with BOA (4 years) and they basically told me to pound sand cause I don't have a score.

I have started the process of credit cards and a authorized user on my fathers card as well. This is what every lender has told me and then they say call back in 4 months. I would like to get prequalified early because homes move fast here and some for good price.

It seems insane to me that I have 5 years of rental history, a good background and job and yet it seems impossible to get past the "get a credit card and pay it down" talk from every lender.

I have 2 questions (one is more curious because I'm interested in the knowledge that many have on this site).

1. Is this typical for a young person to have no credit? Maybe some lenders themselves have experience

2. Second and more importantly, are my options really just pay down a credit card and wait 4 months? I have a person to co-sign as well but lenders told me that is for people with a low income and not for "no credit".

Any info would be great!

Answer 1

Many people have credit cards by the time they are done with college, but it's not unheard of. It sounds like you've been responsible with your money so far, opening a credit card account would help with your credit history/score, if you use it just for some recurring monthly payment like cell phone or utilities that can be an effective way to use it without spending more than you would otherwise.

That said, while some lenders may balk at your lack of credit use thus far, the FHA has guidelines for situations like yours, FHA Loan With No Credit History

The lack of a credit history, or the borrower's decision to not use credit, may not be used as the basis for rejecting the loan application...Some prospective borrowers may not have an established credit history.

The FHA has a procedure in such cases, as described in HUD 4155.1. For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from
- utility payment records
- rental payments
- automobile insurance payments, and
- other means of direct access from the credit provider...

FHA loans have some downsides, but might be the best option if you can't qualify for traditional loans due to lack of credit history.

Edit: I just spent 15 minutes on the phone with a mortgage specialist at the credit union I use for all my mortgages. They do not underwrite loans using any sort of alternative credit history, they need to see something come in on a report from the credit bureaus (a typical minimum is 1 credit card, one car/student loan for at about a year). However, a cosigner may make up the difference for you, the issue with a cosigner is that they evaluate the credit score of both parties, so if there's any doubt about the cosigner's ability to pay by themselves you may still get declined since they're likely to completely discount your credit-worthiness due to your lack of credit score. That is to say, typically a cosigner can only help so much. An alternative would be having the other party take on the mortgage and having you only on the title, but that's a hassle (and likely expensive).

It seems to me an FHA route is ideal if values are escalating quickly in your area and you don't want to put 20% down. Otherwise establishing a credit history and saving up for a while longer would be optimal.

No idea if my credit union is typical. If you find a lender that will work with you on a conventional loan given your current situation, just make sure to compare rates with other options, as I'd imagine they charge a premium.