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Mortgage pros recite a rote list of requirements you need to qualify for a loan. However, they don’t always tell you the whole story. With more stringent lending rules, some banks insist that you have an account history, which produces FICO (Fair Isaac Company) credit scores above 700 to qualify for a mortgage. Would it surprise you to know there’s another way you can be approved for a prime loan?
Fannie Mae and Freddie Mac, which underwrite most U.S. mortgages, provide specific regulations for alternative credit qualification. And FHA (Federal Housing Authority) offers fixed-rate loans, with a current interest rate around 5 percent, based on alternative credit qualification. Your bank may offer these products. They just don’t talk about it much because the loans require more work – for lending departments and mortgage brokers – than a standard FICO-scored loan.
Recently, an old friend told me he has no credit history. This man holds a responsible corporate position, owns his own home and two cars, participates in various philanthropic organizations, holds significant investments, travels, and seems to live a ‘normal’ life. I asked how he has no credit? Knowing his personal information would be sold by credit agencies bothered him so much that twenty years ago, as serious computerized credit data collection ramped up, he dropped out of the system. He paid cash for his house and cars, uses a Visa debit card from a credit union for personal purchases, occasionally jumps through required hoops to rent a car, and prepays for hotels. He uses a company credit card for business travel expenses. All the hassles have been worth it for him to know his personal information is not available to anyone. Only one problem: Now he wants to buy a new house and he doesn’t want to pay cash. He told a mortgage broker he had no credit history; she didn’t believe him. When a credit check indicated the credit bureaus have no record of his existence, he was delighted. Still, he wanted to buy the house.
My friend has paid his bills on time – utilities, cable, landline phone, cell phone, insurances. He contributes money to savings every month. His employment history is ultra stable. And he’s invested wisely. He was an ideal candidate for alternative credit qualification.
Can you answer yes to any of these questions?
- Do you have no credit history?
- Is your credit history insufficient to score, caused by too few accounts?
- Did you stop using personal credit at least seven years ago because you had a mess? Since then, your noncredit bills have been paid on time.
- Do you only use credit in your business’s name, and you have no personal credit history?
Request copies of your three free credit reports (Equifax, Experian and TransUnion) from AnnualCreditReport.com. If you have no credit history or only one or two accounts, using alternative credit qualification you could buy a home. Remember: old negative accounts must be removed from your credit report after seven years and old judgments and bankruptcies after ten years. Alternative credit qualification is not available to people with existing poor credit histories. Be sure to insist old negative information is expunged from your records, with corrected copies of your credit reports sent to you before you apply for a loan.
Freddie Mac defines the basics for alternative mortgage qualification: “An acceptable credit reputation is established by a history that, when viewed as a whole, evidences a borrower’s willingness to make ongoing payments and ability to manage obligations as agreed.”
To qualify, borrowers must have:
- At least three active credit accounts for a minimum of one year, whether or not they’re on the credit report.
- If a borrower does not have three credit accounts, there must be at least four noncredit payment references or a combination of credit and noncredit payment references that add up to a minimum of four. Noncredit references can be your landlord, household utilities (electricity, gas, water, sewer), landline phone, cell phone, cable television, or any other bill you’ve paid for at least 12 months – medical, dental, an appliance, etc. In addition, a documented savings history of at least 12 months can be used as a noncredit reference. Payments need not be made every month. However, the accounts must have been open for at least one year. Your payment history will be verified carefully; don’t consider faking this.
- Financial institutions, which manually underwrite Fannie Mae and Freddie Mac backed mortgages, will require a stable income flow with savings on hand, and could require a higher down payment to offset the credit risk presented by your noncredit payment history. FHA limits the amount of down payment required for their loans.
Some unscrupulous lenders tell borrowers, with limited credit histories, that they can only qualify for high-interest, high-fees, subprime mortgages. This is incorrect information; don’t be sucked in by those practices. Alternative credit qualification opens the door to fixed-rate prime loans – currently with 30-year interest around 5 percent – for financially responsible individuals without credit histories. Find a lender who offers alternative qualifying and manual underwriting. After you have secured your mortgage, know you will not need to open additional personal credit accounts. You can continue to live off the ‘credit grid’.