You’re ready to buy your first home. And like most homebuyers today, you need a mortgage loan to finance that purchase.
But there’s a problem: You haven’t established much of a credit history. You might even have no credit score at all.
That will make qualifying for a mortgage loan more of a challenge. But it won’t make the task impossible. You will, though, need enough money for a larger down payment, one that could ease the concerns of risk-averse mortgage lenders.
Mortgage lenders, of course, rely heavily on borrowers’ three-digit credit scores when determining who qualifies for a mortgage loan. Most lenders consider a FICO credit score of 740 or higher to be an excellent score.
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Most consumers build a credit score naturally over time, usually by using credit cards and taking out auto loans. But what if you’ve never applied for a credit card? What if you’ve not had to pay back an auto loan? You might have little to no credit history. That’s because the three national credit bureaus don’t track whether you’ve paid your apartment rent or utility bills on time. They don’t check, either, whether you’ve paid your medical bills on time.
And when you don’t have much, or any, credit history, mortgage lenders aren’t sure whether you’re a good or bad risk to pay your mortgage on time each month.
How to get around this? Save up enough money for a large down payment. Most conventional lenders require down payments of five percent of a home’s final purchase price. If you don’t have a credit history, you might have to come up with a down payment of at least 20 percent of a home’s purchase price, or $30,000 for a home with a final purchase price of $150,000. This larger down payment means that you have more “skin in the game” and will be less likely to default on your mortgage payments.
Another option? Call several lenders to see if they will accept alternative forms of credit. This could be canceled checks showing that you’ve paid your landlord on time for a year or more or copies of the regular payments you’ve made to your utility providers. Some lenders might be willing to lend to you if you can demonstrate that you have a history of paying your bills on time.
If you find that you can’t land a mortgage, it’s time to concentrate instead on building a credit score. Apply for credit cards and use them responsibly, paying off your balance each month. If you need a new car, take out a loan and pay it back on time. Do this, and you will steadily build a solid credit score.