Many people do not think twice about taking out credit. It’s common to have an auto loan or a credit card. However, there are some people who prefer to get by without borrowing money, if possible. They live within their means, surviving on their income. If this sounds like you, it may surprise you to learn that you could experience problems, should you ever want to apply for a loan to purchase your own home.
This is because credit checks are an important part of the mortgage application process. These checks can reveal that a person has a bad credit history or a limited credit history. You can learn how to get a mortgage with bad credit. However, if you are not someone who usually uses credit, you are more likely to find that you have a problem with a lack of a credit history.
Why having a limited credit history is a problem
Lenders like to limit the risks that they take when approving home loans. This is why they check the credit history of applicants, to see if they have been shown to be good at repaying debt. If you have never taken out loans, or other forms of credit, there is no chance that you will have a positive payment history. This makes it harder for you to get a traditional home loan. If you are unsure about your credit history, you can check it, before you make a mortgage application.
How to solve the problem of a limited credit history
It’s more difficult to get a mortgage if you do not have a good credit history, to support your application. However, it’s not an impossible task. Sometimes, lenders will take into account a non-traditional credit history. This involves proving that you have a good history of making utility and rental payments on time. If you have a history of late payments, it will be difficult for you to get approved for a home loan.
Think about an FHA mortgage
If you are struggling to get a traditional mortgage, because you have an incomplete credit score, you may want to think about applying for an FHA loan. These loans are backed by the Federal Housing Administration, and lenders are encouraged to be more accepting of non-traditional credit histories. However, you do still need to be able to show that you are a reliable borrower. You will need to prove:
- No missed rental payments for at least one year.
- No utility payments that were more than 30 days late, for at least one year.
- No collection accounts in existence, other than for medical issues.
- Debts no higher than 50% of income, including proposed mortgage payments.
It’s important to realize that even if you can prove these points, there is no guarantee of acceptance. You may have to approach a smaller, independent lender instead.
There are options when it comes to getting a home loan when you have a limited credit history. However, there is never any guarantee of success and it’s worth trying to build your credit history, before you apply for a mortgage.