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You Are Ready to Purchase a Home, But Have No Credit: Now What?

You Are Ready to Purchase a Home, But Have No Credit: Now What?

| March 06, 2019
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Before diving into this article, understand that I’ve written this for the few who need to build their credit score. It may be time to buy a house and the bank will want to see a history of payments. If you already have a mortgage or own your home, you DO NOT need to take on consumer debt just to increase your credit score.

What is a credit score?

Basically, a high credit score says, “I borrow a lot of money and I am good at paying it back.”

Notice the ‘a lot’ part. To have a high credit score, you have to borrow a lot of money. Usually, this is in the form of numerous open lines of credit – credit cards, car loans, etc.

And, again, those who have a high credit score are good at paying their lenders back on time.

However, if you’ve read our blog or checked out our Twitter or talked to any of our advisors, you know we don’t vouch for credit. We don’t vouch for consumer debt.

You don’t need a credit card at your favorite retail store simply because you want an extra 10% discount when you shop there. You don’t need a new car every three years. As a matter of fact, we’ve written it in our refrigerator commandments:  drive cars for at least ten years when possible.

I think you get the point – no debt.

With that said, we understand that sometimes you need a credit score. If you’re purchasing a new home, the bank wants to see a strong credit history. They want to know that if they give you their money, you’ll pay it back.

I’m sure you’re a trustworthy person, but the bank doesn’t know that. The underwriter, who makes the decisions behind the scenes; she doesn’t know you. Nor will she ever meet you.

So, you’ve found yourself in a predicament. You’ve done everything right – no credit cards, no debt – but now you can’t get a loan. You can’t buy your dream home.

Our advice is do the best you can. You should aim for the highest credit score you can achieve without any consumer debt. It is easier said than done; after all, I’ve spent the majority of this article telling you ‘no’ to all types of credit.

There are three steps you can take:

  1. Keep your credit lines open for longer periods of time.

If you do have a credit card, keep it open for a longer period of time. Rather than opening numerous lines of credit, maintain one.

This shows the bank a long history of paying back debt.

  1. Check your credit score.

This should go without saying but check your score and dispute any inaccuracies. The last thing you want is a debt that’s incorrect which may be negatively affecting your score.

  1. Pay off your debt every month.

Again, this goes without saying, but make sure you’re keeping up with the payments. Pay off your debt every month.

If you are trying to build a high credit score, you cannot have late payments. You want your score to show timely and consistent payments.

Is it worse to have no credit than poor credit?

Perhaps you were lucky enough to graduate college with no student loans and you have never opened any line of credit – no credit cards, no new cars.

Again, you may be the most trustworthy person in the world, but the bank doesn’t know that. The banks all have a process to give out loans and with no credit at all, it is tough to get a loan. It’s possible, but chances are the bank isn’t going to lend you money.

They don’t know you and they can’t cater to your needs. They’re making loans to thousands of people every year, so it’s easier to have rules. You have to have a credit score. It has to be above X amount. You have to put down so much money.

Zak’s advice: if you have no credit at all, it may not be the worst idea to have one credit card that you pay down every month simply to show you are capable of paying back money.

Let’s be honest, it’s hard enough to save up the 20% you need for a down payment. Imagine how hard it is to save up $300,000 (depending on where you live) because the bank doesn’t know you are good to pay them back.

With that said, don’t go out and get a car loan just to build credit. That isn’t necessary. Just start with a credit card.

Now, that single credit card isn’t going to maximize your score, but it’s going to give you a good track record of being able to pay.

If you have no credit and you want to keep it that way, there are some companies that still do underwriting the old-fashioned way where they pull bank records, investment statements, and whatnot. However, that is getting harder and harder to find. It’s too much work for a lot of companies.

Conclusion

If you absolutely, positively must build credit/improve your credit score, stick to the three simple rules above.

  1. Keep your credit lines open for longer periods of time.
  2. Check your credit score.
  3. Pay off your debt every month.

If you have zero credit, you can consider opening a credit card and making monthly payments. The important thing is making those monthly payments. If you rack up ton of money one month and get behind, you’re only hurting yourself.

Keep in mind, this is geared toward people who need the credit, specifically for a home loan. If you don’t need to increase your credit score – maybe you’ve already purchased your home – you do not need to go get a credit card, nor take steps to increase your credit score.

For more on this, check out the Mind of a Millionaire podcast on iTunes and Stitcher.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No strategy assures success or protects against loss.

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