One of the benefits of the FHA mortgage program is that it uses more flexible qualification guidelines than other loan programs. For example, you can qualify for an FHA loan with a credit score of 580 if you make a down payment of 3.5% of the property purchase price or a score of only 500 if you make a down payment of at least 10%. Both of these credit score minimums are lower than the requirements for other conventional and government-backed low down payment mortgage programs.
But what if you have a limited or no credit history? In some cases the three main credit bureaus do not have sufficient information to develop a standard credit report or credit score for you. There are multiple reasons why someone may not have a traditional credit history -- perhaps you prefer to pay with cash or you have elected to not take out loans up to this point. Maybe the credit bureaus do not have access to all of your accounts or other relevant financial information.
Regardless of the reason, the good news is that you can still qualify for an FHA mortgage with a limited or no credit history. In fact, FHA program guidelines specifically state that “the lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application.”
Review our FHA Mortgage Guide
If you do not have a traditional credit history, the lender is required to establish your credit profile using one of two methods: (1) a non-traditional mortgage credit report (NTMCR) provided by a credit bureau or other reporting agency or (2) by developing a credit history on your behalf by using alternate documentation such as your rent history and other monthly bills. We explain how both of these approaches work below.
Even though the credit bureaus may not have enough information to create a traditional credit report or score for you, they may be able to produce a non-traditional mortgage credit report (NTMCR). A NTMCR is similar to a regular credit report and contains the name of the creditor, the date the account was opened, the account limit, account status, required payment, current balance and payment history including any late payments. In short, an NTMCR offers details on available debt and credit accounts but there is not quite enough information to establish a full, traditional credit report.
An NTMCR may be provided by one of the three main credit bureaus or a reporting agency that specializes in borrowers with non-traditional credit profiles. The lender orders the NTMCR and reviews the information to evaluate your creditworthiness. The NTMCR is also included in your loan application that the lender’s underwriter reviews.
If the NTMCR shows that you make your required monthly payments on time, that you do not have a history of late payments and that you are able to properly manage credit, this should fulfill the credit report requirement for your application. If the NTMCR shows that you consistently miss your payments or that you have delinquent accounts, you are unlikely to be approved for the mortgage.
Along these lines, it is important to highlight that according to FHA guidelines, an NTMCR cannot be used to improve the credit history of an applicant with a track record of late payments, to create a credit report for an applicant with no verifiable credit history or to counterbalance negative credit events such as a collections, judgments or a bankruptcy.
If your credit history is very limited or non-existent then an NTMCR may not be available for you. In this case, your application may still be approved if the lender is able to create a non-traditional credit history on your behalf using other credit references.
To qualify for an FHA mortgage, the lender must provide at least three credit references. The FHA divides credit references into two groups. We list the credit references for each group below.
The FHA places a higher priority on Group I as at least one credit reference must come from this group. Additionally, the lender is required to evaluate all Group I credit references to establish an applicant’s credit history before moving on to the Group 2 References.
Group I Credit References
Utility company payments (gas, electricity, water, telephone, cable)
Group II Credit References
Insurance premium payments that are not deducted from your paycheck
Payments to child care providers
Retail store credit cards
Payments for medical bills not covered by insurance
Internet and cell phone service
Car lease payments
Personal loan payments to an individual
A twelve month history of depositing funds into a bank account that increased the account balance
In order to establish a satisfactory non-traditional credit history using the credit references outlined above, the applicant cannot have any late rent payments for the prior twelve months, a maximum of one 30 day late payment on other accounts and no accounts in collections in the past year, except for medical bills.
To verify your rent payment history, you are required to provide twelve months of cancelled rent checks or a letter from a property management company that outlines your on-time monthly rent payments for the past year. Additionally, for all other credit references, the lender is required to confirm an address or telephone number for the reference and not rely on information submitted by the borrower.
To summarize the information above, if an NTMCR is not available, your lender can establish your credit history by using at least three credit references, one of which should be your rent payment history. In short, if you can demonstrate that you have paid your rent and at least two other bills on time for the past twelve months, that should be sufficient to establish the non-traditional credit profile necessary to qualify for an FHA mortgage.
There are several other points to keep in mind when you apply for an FHA loan with no credit history. First, the qualification guidelines are different as compared to applicants with a standard credit report and credit score.
FHA guidelines apply a maximum debt-to-income ratio of 43% for borrowers with non-traditional credit profiles which is lower than the 50% or greater debt-to-income ratio permitted for other applicants with supporting factors such as a high credit score and significant income. The lower the debt-to-income ratio used by the lender, the lower the mortgage amount you qualify for.
Use ourFHA MORTGAGE QUALIFICATION CALCULATORto determine the FHA loan you can afford
FHA applicants with non-traditional credit profiles are also required two hold two months of total monthly housing expense as savings in reserve when your mortgage closes. Total monthly housing expense includes your mortgage payment, property tax, homeowners insurance, FHA mortgage insurance premium (MIP) and homeowners association (HOA) dues, if applicable.
For example, if your total monthly housing expense is $2,500, you are required to hold at least $5,000 in your bank account at closing, which is a significant financial commitment in addition to your down payment and closing costs.
Additionally, non-occupant co-borrwers or co-signers are not permitted for applicants with non-traditional credit profiles. So if you are planning on having a parent or other relative help you qualify for the mortgage, this is not allowed according to FHA eligibility guidelines.
The final point to highlight about applying for an FHA mortgage with a non-traditional credit history is that it requires manual underwriting. Simply put, manual underwriting requires extra time and documentation on the part of both the lender and the applicant as compared to automated underwriting. In this specific case, the lender may be required to construct your credit history by compiling your bills and payment history for the past year, which takes additional effort.
Not all lenders work with applicants that require manual underwriting so it is important to understand upfront if a lender is willing and able to work with borrowers with non-traditional credit histories. Finding a lender with relevant mortgage experience is especially valuable because the application process can be complicated and time-consuming.
In closing, although qualifying for a mortgage if you have a limited credit profile is challenging it is definitely possible if you select the right lender and mortgage program. The FHA program is designed to make homeownership more attainable, especially for applicants with a limited or no credit history.
FHA mortgages are provided by approved lenders. We recommend that you contact multiple lenders in the table below to understand if they work with borrowers with non-traditional credit profiles, to determine your eligibility and to compare mortgage terms.
FHA Program Guidelines for Applicants with Non-Traditional Credit History: https://www.hud.gov/sites/documents/41551HSGH.PDF
Establishing a Non-Traditional Credit Profile for an FHA Mortgage Applicant: https://www.hud.gov/sites/documents/4155-1_4_SECC.PDF