Did you know that not everyone needs a credit score to obtain a mortgage? A thin credit profile, as it is called, can still allow you to gain approval for specific loan programs, including the USDA and FHA program, which allows for no or low down payments and very lucrative financing terms. A non-existent or thin credit file just means that you do not have “traditional” credit, which means things like car payments, mortgages, and credit cards. If you have “alternative” credit and it has a good history, you might still be able to get approved.
Examples of Thin Credit
Thin credit can look different for many borrowers; there are no rules stating who qualifies for this type of profile and who does not. Here are a few examples:
- Bob has never held a mortgage, car loan, student loan, or even a credit card. He does not have enough trade lines to create a real credit score. What Bob does have, however, is a history of paying rent for the last 5 years with the same landlord and a history of paying his utilities on time for the last 5 years as well. With adequate proof of these trade lines, such as canceled checks, bank statements, and letters from the appropriate parties, Bob is able to get approved with his good credit in an alternate way.
- Jan has also never held a mortgage, but she does have one trade line – a car payment. She originated the car loan 3 years ago and has had timely payments the entire time. She does not have a credit score because one trade line is not enough to give her a score, but the history shows that she is responsible with her finances. Jan also has paid rent for the last 3 years with 2 different landlords, each of which verified that she never had a late payment during that time. Jan is able to get approved based on her alternative credit history as well.
An Alternate Way to Get Financed
Bob and Jan are just two examples of people that are able to use alternative credit to get approved for a mortgage. Lenders just need to see that you are responsible with your finances and that you have had serious financial responsibilities before. Just having the proof of timely utility payments might not be enough, but adding to those trade lines, the ability to make rent payments on time for 5 years was enough to push Bob through for a loan approval. The same is true for Jan; just a car payment with a good payment history would not have been enough, but adding the timely rent payments helped her case.
Of course, credit is not the only factor that gets considered when approving you for any type of loan, including USDA and FHA financing, despite their flexibility. Your job history, income, and amount of assets also play a role. A person that has a thin credit profile and hops from job to job several times per year will not be a likely candidate. However, a person with thin credit and a stable job for several years might. The key is to have compensating factors to make up for the fact that you do not have traditional credit that the lender can rely on. Landlords, utility companies, and even insurance companies can provide some faith for a mortgage lender, but they need more to go on to ensure that you are a good risk. The more positive factors you can provide, the better off your chances of obtaining a mortgage with thin credit become.