HUD restricts FHA lenders from turning down an application because a borrower doesn’t have sufficient credit history. HUD also recognizes that a limited or nonexistent credit history may be indicative of a conscious choice by the borrower. Just because there are relaxed credit requirements for this type of loan does not mean that the applicant will qualify for a loan. There are other factors that lenders will consider before approving a borrower for a no credit mortgage.
If a home buyer doesn’t have a traditional credit history such as a line of credit, home loan, student loans, or previous mortgages, they can explore other options. HUD asks FHA underwriters to verify the nontraditional credit reports of applicants, as well as gathering copies of utility payment records, auto insurance payments, rent payments, and any other regular payments that can be verified.
If a lender needs to verify an applicant’s nontraditional form of credit for a loan, HUD requires the lender to go to the source. For instance, HUD will not permit a lender to rely on a home buyer’s verbal or written claim of a non-traditional line of credit. Alternatively, HUD has the lender directly contact all your nontraditional credit providers to verify your payment history. To document rent payments, HUD allows a year’s worth of cancelled checks or direct verification from the landlord.
Fortunately, those with bad credit and high debt-to-income ratios can still qualify for mortgage loans from conventional mortgage lenders. The bad news is that these lenders will charge home buyers high interest rates. This is crucial. Interest rates hinge on the total amount of the mortgage loan. Higher interest rates can cost borrowers hundreds of dollars each month.
Credit is a major factor when lenders are determining your credit worthiness. They will use credit scores to calculate the interest rate of your mortgage as well. Borrowers with lower credit scores will typically pay higher interest rates than borrowers with good credit.
Credit scores usually range from 300 to the upper 800s. Most mortgage lenders will give borrowers with credit scores of 750 or higher the best rates. If you have a credit score under 620, you may run into trouble qualifying for a conventional mortgage loan. If this is the case, then you may have to get a subprime mortgage loan that comes with slightly higher interest rates.
There are a few key factors that can lower your credit score. Home buyers with poor credit will naturally have lower credit scores. Consumers who carry high levels of credit card debt will also see their credit scores drop.
Consumers with low credit scores can compare quotes from different mortgage lenders to find the best rates. Lower credit scores will definitely prevent home buyers from getting the best rates. Despite this, lenders vary from region to region and even borrowers with a large amount of debt and poor credit histories can obtain affordable home loans.