A few things you should know before applying
The time has come. You're ready to leave renting behind and buy your very own home. There's just one problem — your credit history is rather short, and you've heard you can't get a mortgage with new credit. Does this mean you have to wait two more years or some other specified period of time before you can buy real estate?
In most cases, no. You don't have to wait. There are actually several types of mortgages available to buyers with new credit, and there are also banks that offer what's known as "manual underwriting," which often makes getting a mortgage possible for those with new credit. Here's a closer look.
FHA Mortgages
An FHA mortgage is a mortgage that is backed by the Federal Housing Administration. In other words, if you stop paying the bank, the Federal Housing Administration will, which decreases the risk that the bank takes in lending to you. FHA mortgages are really popular with first-time buyers because the requirements are lower than for a traditional mortgage.
There is a credit score requirement for an FHA loan — borrowers need to have a credit score of at least 500 to qualify, and of at least 580 to qualify with less than a 10% down payment. However, you do not need to have a long credit history. If you have new credit, your lender can instead look at your history of employment, and on-time utility and rent payments, to determine your worthiness. If you've barely used credit, but you've used it responsibly and always paid your bills on time, you should have no trouble qualifying.
VA Mortgages
If you are an active member of the service or a veteran, you may wish to apply for a VA loan. This is a mortgage insured by the Veterans Association, meaning that the VA will pay the lender if you default on the loan.
There is no minimum credit score requirement for a VA loan, but most lenders do want to see a score of at least 620. Still, the lender will consider your income, employment status, and payment history, so credit score and credit history are not as important — and you can typically qualify with new credit so long as you've been financially responsible overall.
Manual Underwriting
What if you do not qualify for an FHA or VA mortgage? Then your best option for getting a mortgage with new credit, or even no credit at all, is to look for a lender that offers manual underwriting. This means that instead of just evaluating your creditworthiness based on your credit score and credit history, the bank will take a more in-depth look at your employment, income, and payment history.
When you apply for a mortgage through a bank that offers manual underwriting, you will be asked for a lot of documentation. You will need to provide proof of income, records of all of your rent payments for several years, bank account statements, and maybe even letters of reference from landlords and employers. Collecting all of this paperwork can be cumbersome, and it may take longer for the bank to approve your loan than it would if you had a longer credit history. However, manual underwriting is a great choice for borrowers who are responsible but have not utilized a lot of credit in the past.
Getting a mortgage with new credit is not as difficult or impossible as you might have heard. Many people qualify for either an FHA or VA loan, and if you do not, there are banks that offer manual underwriting and frequently lend to borrowers just like you.
Equal Housing Lender