What Does It Take To Buy A House Without Any Credit?

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While the housing crisis made the American dream of owning a home fade for some, many people have owning a home on their life’s goal list. Usually owning a home means getting a mortgage, but what if you have no credit score or just don’t have the credit to buy a home? Can you still buy a house? The answer is yes you can. There are two ways: build your credit or pay cash.

Paying Cash

In 2015, all-cash transactions made up 30.1% of single-family home and condo purchases. There are three reasons people pay cash for homes:

  1. Getting a mortgage costs money, even with the tax write offs that are available. Paying mortgage insurance, underwriting fees, document fees paying points, etc. can cost thousands of dollars. And that’s not including the cost of mortgage interest. Paying cash is definitely cheaper.
  2. All cash transactions appeal to people who want to fly under the radar; they don’t like the thought of banks going through their personal financial statements.
  3. A person may want a fast close. With a mortgage, the process of home buying takes several weeks; paying cash can close a home in a few days.
  4. If a person’s credit will not allow them to qualify for a home, going all cash is the solution.

The likelihood of an all-cash purchase increases or decreases depending on where the transaction takes place: in some areas of the country a modest single-family home can cost more than a half a million dollars; in others, you can get a home for under $100,000. The more a home costs, the less likely it is for all cash transactions to take place.

The disadvantages to paying cash:

  1. Getting a mortgage is relatively cheap right now, with interest rates hovering around the 4% range and the cash paid for a mortgage could be put to use in other investments. Historically, the stock market beats out real estate investments.
  2. Though tax write offs do not cover all the costs of a mortgage, you cannot write off mortgage interest or points on your taxes.
  3. Having enough cash to pay for a home without any financing probably means that you’ve saved money for a long time, inherited your money or make a lot of money. For most people, especially if you’re young and just starting out, these are circumstances that are probably not going to describe you.

Building Up Your Credit if You Don’t Have Any

For most people who have no credit or have bad credit, building or rebuilding credit, and not paying cash, are the ways they will achieve home ownership. Building/rebuilding credit is not quick: you can expect the process to take a year or more. If you decide to go this route, here are the steps:

  1. Understand what good credit is. It’s always good to have a goal. Credit scores range from 300 to 850, with 850 representing the best credit. To qualify for any mortgage program, the minimum is generally 620. However, if you qualify with a score on the lower end of the scale, you will be paying higher interest rates. For the best interest rates, you need to have a minimum score of 740 points.
  2. Pull your credit report. If you don’t already know your credit score or have not seen your credit report recently, this is the next first step. You need to know what kind of credit you are starting with in order to get to the next level.
  3. Look for easy credit. The easiest unsecured credit to get would be gas company credit cards or department store cards, but watch out for higher interest rates and fees… A secured credit card is an excellent way to build credit. No matter which credit product you choose when applying for new credit, make sure that the card will be reported to the credit bureaus.
  4. Become an authorized user on someone else’s account. Of course, this requires a level of trust, as you will be getting a credit card linked to someone else’s credit account. To promote assurance, you can make the deal that you will be made an authorized user and not use the credit card at all. The people most likely to add you as a user: parents, spouses or close friends. Of course, you must also be picky and choose a person with accounts in good standing: the authorized account will do you no good if the account has late pays associated with it.
  5. Make sure you pay all of your bills on time from this point forward. Your credit pay history is the largest component (35%) of your credit score. Even if you have a spotty pay record in the past, you can overcome it by making timely payments in the present. Late payments lose their impact after about 24 months (though the impact does not totally go away for 7 years).
  6. Borrow against a savings account or investment. Many credit unions have this type of loan to help borrowers establish new credit. How it works: you open a savings account or a certificate of deposit, then take a loan using this account as security for the loan. The amount of the deposit can be as little as $500, and the loan taken against it will be an installment loan, a type of loan, when paid on time, looks good on your credit report. When combined with a secured credit card, this combo packs a punch on your credit report: it gives you a mix of credit (10% of your credit score).
  7. Have patience. It usually takes about 12 months of account history to be scoreable by the FICO model, the scoring model used by most lenders. VantageScore models can score you with only 6 months of history, but only a few banks use this type of score.

Related Articles:

10 Steps to a Speedier Mortgage Loan Approval

Expanding the “Credit Box” for Worthy Consumers

How Does Your Credit Score Determine How Much House You Can Buy? 

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