When you fill out a mortgage application, the first thing the lender is going to do is pull your credit. If you are just starting out in terms of your credit, you might not have enough trade lines to create a credit score. How do you get around this scenario, called “ thin credit”? Luckily, there are ways to make yourself look financially responsible, enabling you to get various types of loans including FHA, VA, USDA, and conventional loans.
Use Alternate Credit
If your credit report is so thin that you do not have a score at all, some lenders allow you to use what is called alternate credit. This simply means that you use other monthly obligations that do not report to the credit bureaus. Because only certain companies and industries report to TransUnion, Equifax, and Experian, there are several other ways to determine your financial responsibility. The most common debts that get reported on the credit report include:
- Installment loans (personal loans, student loans, car loans, etc.)
- Revolving Credit (credit cards both major and department store)
- Mortgages (first and second liens)
- Some utilities (Nicor is among the utilities that reports if you pay more than 30 days late)
If you do not have any type of the above loans, you will not have a credit score or adequate credit file. If you do pay things like any of the following, however, you may be able to qualify for a loan:
- Insurance payments (renters’ insurance, car insurance, health insurance)
- Utility payments (electric, gas)
- Tuition payments (college or trade schools)
- Rent payments
- Childcare payments
The payments you make to any of these vendors, as well as multiple others, will need to be verified either by the third party that they are paid to or with your canceled checks. The lender will determine if the payments were made on time based on the dates on the canceled checks and the verification with the third party as to the timeliness of the payments.
Proving Alternate Credit
The best and sometimes the only way to prove alternate credit is with your canceled checks. If you choose to make the payments you wish to use as a trade line with cash, it is very hard to prove timely payments. Even with the word of the person you make the payments to, there is no paper trail and most lenders require that paper trail for extra reassurance. If you know that you are going to be filling out a mortgage application in the near future, start making payments by check. This will start the paper trail that is necessary. Typically, you need at least 12 months in order to use a trade line, so the earlier you start, the better.
Using a Co-Borrower
If you cannot establish yourself with alternate credit well enough to qualify for the loan, you can use a co-borrower. This could be someone that lives with you and has adequate credit to qualify for the loan or someone that will not live with you, but is willing to co-sign on the loan. Of course, this needs to be approached with caution, especially if the co-borrower will not live with you as they are as legally responsible for the loan as you are. If you were to stop making payments, your co-signer would be responsible for the payments. Sometimes, however, the co-borrower is the best option you have to obtain a loan.
Alternate Credit does not Replace Bad Credit
It is important to realize, however, that alternate credit cannot be used in the place of bad credit. For example, if you have a credit score of 500, your chances of getting approved for any loan are very slim. Lenders do not like to take chances with low credit scores, with the exception of those borrowers that have an adequate explanation for the low credit and plenty of compensating factors to make up for it. In this case, a score of 500 would only leave you eligible for an FHA loan, but that eligibility is still very slim. Something you could not do in this scenario is use 12 months’ worth of canceled checks for your utility and insurance payments, assuming that you could make up for that 500 credit score. Lenders take the credit report first – if it has a score and it has negative reporting, it takes precedence.
If you have a thin credit file, you may still be able to get a loan. There are many lenders out there that are willing to work with borrowers with this type of credit. You might not get the conventional or even FHA loan you desired, but there are other alternative loans out there. This does not mean you are subjected strictly to subprime loans; you simply need alternative types of financing to get around the latest mortgage regulations that make it a little more difficult to obtain a loan today, but with the right lender, any loan is possible.