FHA Loan Feature Allows Buyers to Buy a Home with a Zero Credit Score

Can you buy a home with no credit score? Learn how to overcome a zero traditional credit score to take advantage of historically low rates and home prices to become a first time homeowner with a government insured FHA mortgage loan.

According to the Housing and Urban Development press release HUDNo.10-153, "Home affordability in the U.S. remains near the most attractive levels in 10 years." When home prices reflect a buyer's real estate market, it may be a good time to buy your first home. So why are more first time home buyers not joining the leagues of home owners? There are millions of Americans who, for a variety of reasons, have no or very little traditionally reported credit. These "credit underserved" people, as they are defined, often believe that their lack of credit limits home buying options. However, for many "credit underserved", it is possible to use alternate credit to obtain a FHA loan with no credit score.

Instead of traditional credit report scoring, FHA lenders who underwrite and lend to borrowers who have no credit scores will want to see an "alternate credit" history. Alternate credit is a history of payments made to creditors, companies, or even landlords that do not report payment histories on a traditional credit report. Typically, the lenders will request 3-5 of these alternate credit references. These references that you supply to the lender should reflect that you have made payments on time for at least the most recent 12 months. They can be pay histories from the company, cancelled checks for payments that you have made or simply a letter on the company's letterhead stating that you have met your obligations for the last 12 months.

Identifying these sources can sometimes be challenging for first time homebuyers. Examine your checkbook or monthly bank statements for reoccurring bills. These can be payments to utility companies, cell phone, internet companies, landlords or rental companies, car insurance, rent-to-own and "buy here pay here" auto dealers to name a few.

By presenting verifiable alternate credit to your lender you will overcome not having any credit score. Alternate credit references build a payment history for the underwriter to review as he or she considers your likelihood of repayment. While the other standard FHA loan requirements such as income verification, debt to income calculations, 3.5% of the purchase price for down payment on the home and an appraisal must also be considered as the mortgage application is reviewed, using alternate credit sources helps many overcome the credit requirements of an FHA mortgage loan.

Sources:
HUD Press Release No. 10-153

Credit scoring and the credit-underserved population