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Here are the alternative routes to approval.

For many homebuyers, establishing credit came naturally once they began working, applied for a credit card, took out a car loan or paid back student loans. But what about potential homebuyers who don’t have a credit score, either because they are averse to credit cards or have yet to build up a substantive credit history? Can they still apply for a mortgage?

The answer is yes, but “it’s exceedingly difficult to obtain a mortgage without a credit score,” says Tim Ross, president and CEO of Ross Mortgage Corp. in Royal Oak, Mich. “Lenders use automated underwriting systems that base a loan decision on certain criteria, including a credit score. But there are some nontraditional sources that can be used for credit verification.”

Mortgage lenders typically require a credit score of at least 620 or 640 to even consider an applicant for a loan.

Whether you prefer not to use credit cards, are new to this country or are simply a younger borrower who hasn’t built up enough credit history, there are some alternative sources that mortgage lenders can use to determine your credit risk.

While most lenders require three or more sources of credit, Clint Madison, a senior mortgage banker with Envoy Mortgage in Walnut Creek, Calif., says, “I’ve worked with borrowers who have a slim credit file and been able to get them approved for a loan. The first thing we look for would be 12 to 24 months of canceled checks or verification from a landlord of on-time rent payments.”

Alternative sources of credit
Here are several other items that can be used for nontraditional credit verification, Ross says:

  • Utility bills for gas, electricity or water, as long as they are paid separately from your monthly rent.
  • Phone and cable bills.
  • Car insurance, renters insurance, life insurance or medical insurance payments, if they are not paid by payroll deduction.
  • Child care or school tuition payments.

The more evidence you can provide that indicates a history of on-time payments, the greater your chances of qualifying.

“You need at least 12 months and sometimes as many as 24 months of payments to prove your creditworthiness,” Ross says. “A bigger down payment offsets your credit risk, and so does your job stability, your cash reserves and a high income in relation to your debts.”

Credit history matters
The reason for your lack of credit history will also affect your ability to qualify for a loan.

“If you’re living with your parents and have yet to establish any credit, it’s pretty much impossible to get a loan unless your parents are willing to co-sign for you,” Madison says. “The parents will need a credit score at a minimum of 660, and you’ll need to have at least two months, or maybe as much as six months, of principal, interest, taxes and insurance payments in cash reserves in the bank.”

Borrowers who are new to the United States may have a credit report from another country. Ross says those credit reports can be used to create a record of bill payments for a loan application.

You may not know your true credit score
Even consumers who have a credit history long enough to produce a score still need alternative sources of credit when applying for a loan. The Consumer Financial Protection Bureau recently released a study that showed there are often discrepancies between the credit score given to a consumer and one reported to a lender.

“This study highlights the complexities consumers face in the credit-scoring market,” CFPB Director Richard Cordray said in a news release. “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.”

The problem, Madison says, is that borrowers are set up for false expectations.

“They may either be expecting to qualify for a better rate than they do, or they may lose out on opportunities for which they don’t believe they will qualify, when in reality they can,” he says. This is why having alternative sources of credit, which can help prove your ability to repay a loan, is important.

Establishing credit
Ross says it takes just six months of credit-card usage to generate a credit score, but lenders would also need other sources of credit in addition to your six-month-old score.

“Using alternative credit doesn’t change someone’s credit score, so if your score is low, all you can do is let time pass while you do the right thing over and over again,” Madison says.

It’s especially important that prospective buyers with thin credit consult with a mortgage lender, Ross says. A lender can provide them with a plan to follow to improve their chances of qualifying for a mortgage.

 

Compliments of: Martha Small | Austin Portfolio Real Estate | 512.587.0308

Original article by: Michele Lerner of HSH.com

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When you’re in the market to buy a home, your credit score is very important. Most lenders use this three-digit number (which is created by evaluating factors like how much debt you have, your payment history for things like credit cards and car loans, and the length of your credit history) to determine your credit risk. This number helps lenders predict whether you’ll pay back your loans and if you’ll pay them on time.

Mortgage borrowers with the best credit ratings generally get lower interest rates. Their monthly mortgage payments are also lower, according to myfico.com, the website for the Fair Issac Corp., which created the most-used credit rating, the FICO score. (Your FICO score can range from 300 to 850; the higher your score, the better. Credit scores tend to be better for people who have credit — e.g., have credit card accounts — and pay off their credit on time.)

Generally, consumers with ratings in the mid 700s or higher get the best interest rates. (But this depends on the economic climate — 680 was once considered a good score.)

For example, when we last checked data made available on myfico.com, a person with a better FICO score (760-850) was able to get a monthly mortgage payment for a 30-year fixed mortgage that was about $41 lower than someone who had a credit score of 700-759, according to the website’s calculations. That person with the better FICO score would spend $492 less on mortgage payments over a year’s period than the person with a lower score.

So, if you can increase your credit rating, you could save money over the length of your mortgage. (We all like to save money!) But raising your credit score isn’t easy and takes time. (Like getting into shape, or sticking to a diet.) But if you keep to it and are diligent about it, you can increase your credit rating. Here’s how:

  • Check your credit report

    Keep tabs on your credit report by getting a free report once a year with freecreditreport.com (be careful of other scam sites). Go over it carefully, and make sure there aren’t any errors, such as a payment that was reported late that wasn’t, and mentions of accounts that don’t belong to you. Report any errors on the provided form.

  • Pay bills on time

    Lenders don’t like to see late payments — even paying bills just a few days after the due date can negatively impact your score. Not paying your bills on time will lower your credit rating. Also, the longer you keep paying your bills on time, the better your credit score will be.

  • Reduce credit card debt

    Work to keep the balances low on your credit cards — try to keep them well below your credit limits. Pay off as much credit card debt as you can, paying off the cards that are closest to their credit limits first. (Lenders like to see credit activity, but it doesn’t look good if it appears that you are stretched to your credit limits.)

  • Don’t open/close accounts

    Also, don’t open new cards while trying to increase your rating, but don’t close old accounts, either. (Both could negatively affect your score.) If you are new to credit, rapidly opening new credit accounts could make you look risky and will also lower your credit age. (Lenders prefer people with stable and lengthy credit histories.)

  • Use your old cards

    If you have any credit cards you haven’t used in a while, try using them again. By making charges on the cards that you took out a long time ago, you’re improving the age of your credit history and will look like a more reliable borrower.

 

Compliments of: Martha Small | Austin Portfolio Real Estate | 512.587.0308

Original article by: Trulia

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