Posted 07/12/2017 by Erik Sherman Erik Sherman has written about business, technology, and personal finance for the Wall Street Journal, Newsweek, New York Times Magazine, Forbes.com, Inc.com, and many other publications. Share This Page As Seen On Erik Sherman The Mortgage Reports Contributor Getting A Mortgage When You Have No Credit First-time home buyers face challenges that more experienced home buyers do not.
For example, a first-time home buyer may not be able to show the same stable work history that a more experienced buyer can show; and a first-time home buyer not have as much money saved. But, perhaps, the biggest difference between a first-time home buyer and an experienced one is that first-time home buyers are less likely to have credit history. First-time home buyers have had no mortgage, may own their car outright, and may reach for debit cards over credit cards when given the chance.
These three traits put first-time buyers "off the credit grid" and can make getting mortgage-approved a bit of a challenge. [embedded content] Call it the unintended consequence of debt-free living: with no visible evidence that you've managed credit accounts in the past, mortgage lenders become (rightfully) nervous about your ability to repay on a loan -- there's no history for them to go on. Thankfully, you don't need a traditional credit profile to get mortgage-approved.
The FHA mortgage is available to first-time home buyers with "thin credit" or no credit whatsoever; and FHA-backed mortgages are available from nearly every mortgage lender. Verify your home buying eligibility (Feb 19th, 2018) What Is A Credit Report? A credit report is a written account of all creditor accounts which belong, or have belonged, to a person in their lifetime. Credit reports are a compilation of information from credit bureaus, which are companies to which creditors report borrower payment history on a regular basis.
In the mortgage space, there are three main credit bureaus -- Experian, Equifax, and TransUnion. Each bureau uses the information available to it to assess your individual credit score. A credit score is a numerical representation of the likelihood that you'll stop paying on your mortgage. The higher your credit score, the more likely you are to make payments. The algorithm which uses your credit report to determine your credit score is cloaked; we don't know how each line item affects the final score.
However, we do know that your payment history is the single biggest factor in determining your credit score. It's why first-time home buyers rarely have credit scores that are "excellent". There's just not enough history of managing credit and making payments to make that kind of determination. It's okay to have less-than-perfect, though. It's even okay to have no credit. As a first-time home buyer, you can still get mortgage-approved.
Verify your home buying eligibility (Feb 19th, 2018) FHA Mortgages Don't Require "Traditional" Credit First-time home buyers tend to carry credit scores which are lower than the general population. Often, this is because first-time buyers have only a short history of managing credit, and payment history is the largest component of a person's credit score. The solution, though, is not to go out and get a credit card or two; or open up a car loan.
This would actually do more harm than good to the credit score. Seeking new credit lines is a negative in the credit bureaus' credit score algorithms and, besides, until 12 months of payment history exist for each of the new accounts, the effect on a borrower's credit score is heavily muted anyway. The better, faster solution is to seek out mortgage loans meant for borrower with little or no credit to their name.
The FHA mortgage is one such option. As the FHA loan's sponsor, the Federal Housing Administration, states on its website: "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." Instead of turning away borrowers who have not had a chance to build a credit history (or who have preferred not to), FHA mortgage guidelines instruct lenders to look at all aspects of a mortgage application.
This is good for first-time home buyers because FHA loans allow for a low down payment of just 3.5%, which can help a household with good income but less-than-optimal savings move from renting into homeownership. And, there's a large market for this type of loan, too. Some estimates put the number of credit-lacking consumers at more than 5 million nationwide. Don't let your lack of a credit score discourage you from purchasing a home.
There are ways forward. What Are Today's Mortgage Rates? Via the FHA mortgage program, first-time home buyers don't need to show credit history -- or even an active credit score -- to get approved for a mortgage loan. Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores. Verify your home buying eligibility (Feb 19th, 2018) Erik Sherman The Mortgage Reports Contributor Erik Sherman has written about business, technology, and personal finance for the Wall Street Journal, Newsweek, New York Times Magazine, Forbes.
com, Inc.com, and many other publications. The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.See Also: Ge Appliances Gas Range
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You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved. Here's how we make money. Looking for the first-time home buyer tax credit? You may be thinking of the federal program implemented under the Obama administration. We hate to be the bearer of bad news, but it doesn’t exist anymore.
However, don’t despair: Other programs can help you get a first mortgage. To learn what happened to the first-time home buyer tax credit, and find where you could get help now for a first mortgage, read on. The first-time home buyer tax credit In 2008, the Housing and Economic Recovery Act sought to encourage Americans to purchase homes by creating a tax credit worth up to $7,500 for first-time buyers.
The next year, Congress increased the amount to $8,000. After that, the legislation changed a few more times, so depending on when you bought your home, the credit was either a true tax credit gifted to you, or it was essentially an interest-free loan that had to be repaid. The tax-credit program ended in late 2010. While some people who bought homes before then can still claim the credit, Americans buying houses now cannot.
Other programs for first-time buyers Although the federal tax credit is no longer available, there are other first-time home buyer programs out there that make it more affordable to buy a home. The programs are typically offered by states, counties and cities, and it can take a little research to find these options, which may include zero-interest loans, grant money to put toward a down payment and tax credits.
Here’s an example of a program in Texas: The Texas State Affordable Housing Corporation offers two programs for first-time buyers — one for home buyers with low and moderate incomes, and one for teachers, firefighters and Emergency Medical Services personnel, police, correctional officers and veterans. The programs offer down-payment assistance, and buyers can also apply for a Mortgage Credit Certificate, which is a special tax credit up to $2,000 annually based on mortgage interest payments.
To find the programs that could provide help for the purchase of your first home, search a city or address on Down Payment Resource to see a list of what’s available. It’s also a good idea to find your state’s Housing Finance Agency and learn about the resources for first-time home buyers. Note that some programs have a maximum on income and property value in order to benefit lower-income buyers, and others require several hours of home buyer counseling classes to qualify.
Also pay close attention to whether you’re required to repay the financial assistance or if it’s being gifted to you. More from NerdWallet:Best lenders for first-time home buyersTax deductions for homeownersGet preapproved for your mortgage Emily Starbuck Crone is a staff writer at NerdWallet, a personal finance website. Email: email@example.com.