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One of the side effects—or side benefits—of becoming and living debt free is that you eventually fall off the FICO radar. You become one of the 64 million “unscorable” consumers who haven’t had an active credit account for at least six months and therefore can’t qualify for a mortgage with many lenders.
If you’re one of these unscorable folks, you know the advice you’ll get when you apply for a mortgage, right? “Get a credit card, a car loan, or a loan just for fun. But don’t run up your balances, always make your payments on time, and never close your accounts.” Basically, they’ll tell you to go back into debt and never get out. What’s more, they’ll tell you this is the only way to qualify for a mortgage.
You Have to Work for It
While it’s true that getting a mortgage without a FICO score is more difficult, it is far from impossible. But you must be willing to jump through all your lender’s hoops to prove you are mortgage worthy.
The first hoop will be documentation—lots and lots of documentation. The more evidence you can provide of your history of on-time payments, the greater your chances of qualifying for your mortgage.
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You’ll need to show verification of your income for the last 12–24 months as well as a steady payment history for at least four regular monthly expenses. These expenses may include:
—Utility bills not included in your rent payments
—Phone, cell phone or cable bills
—Insurance premium payments
—Child care or school tuition payments
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Normally, Dave recommends a down payment of at least 10%. But unscorables should aim for 20% or more since it reduces the lender’s risk and demonstrates your ability to handle money responsibly. You’ll also be more likely to get a favorable interest rate. Also, your monthly mortgage payments should be no more than 25% of your take-home pay on a 15-year loan. Dave’s home-buying guidelines are conservative enough to meet most lenders’ approval.
The Low-Score Hurdle
Keep in mind that this nontraditional loan process will work for people with no credit score, and that’s not the same as a low credit score. A low credit score will be difficult to overcome with nearly any lender—even those who allow alternative credit histories.
If you have a low credit score, wait a few months, continue paying your monthly expenses on time, and apply again when you are truly unscoreable with FICO.
Hope for the Future
The unscorable group has grown large enough that it’s getting attention with Experian, Equifax and TransUnion, the three credit bureaus FICO uses to determine its scores. They have developed the VantageScore model that looks at 24 months of credit history instead of six months. It also includes rent and utility payments—even public records when they’re available.
Under the VantageScore model, one-third of previously unscorable consumers were found to be good or excellent credit risks. Some of the nation’s biggest lenders are now testing the model, so it could become more commonplace over the next few years. It’s not yet a perfect solution, but it’s a major development for folks who strive to live debt free but want to buy a home with a mortgage.
With all the work you’re putting into securing a mortgage without a credit score, make sure you get into the right home at the right price. An experienced real estate agent can help you find your new home, negotiate the sales price, and walk with you through the closing, saving you time, money and stress. Let us help you find an agent you can trust in your area today.