One of the most common responses I get to the question “So why do you need to build a credit score?” is “So I can later buy a house.” What if I told you there was a better way to buy a house that didn’t require you to live under the shadow of your credit score? It’s possible. Here’s how it works…
1. A Credit Score Doesn’t Define You
Your credit report, and thus your score, is not a reflection of your financial health or responsibility with money. It is merely a measure of your interaction with debt and nothing more. Your utilities, rent payments, and other non-debt bills are not reported and those credit agencies who do list them do not factor them into your credit score. That’s because they aren’t credit! So how do you get a house without a credit score? There’s a better way called manual underwriting.
2. It’s In Your Best Interest
Manual underwriting is in your best interest. This is what lenders used to do before they could just over simplify it and write more loans (more money!) because they could just look at a score. Too high? No loan. Too low? No loan. Goldilocks just right? Loan!
Manual underwriting requires more work from the underwriter. They actually have to find out more about you. Such as your income and other variables that show whether or not you’ve been responsible with your bills. Then they ask for 4 or 5 sources of “alternative credit”. What does that mean? It simply means non-credit bills showing you’ve paid responsibly. Rent, insurance payments, light bill, etc.
They’ll want these on a one-page document showing you are in good standing for the last 12 months and signed by a supervisor. For the rent checks they’ll want copies of the checks showing they cleared.
Pretty simple right? They’ll then take the information from the interview for the loan and those “alternative credit” sources you provided and generate… a credit score. That’s right, they generate a faux credit score using a non-credit history to approve you for a mortgage.
Most mortgage lenders will approve you for 40% more than you can afford. Manual underwriters are typically more conservative because they are really considering your likelihood of paying this mortgage so they’ll only approve you for what you can really afford. That’s in your best interest!
By the way, how do I know this works? Because I’ve actually done it! We didn’t take the house and instead moved to a different area, but we were approved through the manual underwriting process with no credit score.
3. The House Will Be More Affordable
Because you’ll be approved for what you can really afford your monthly payment including mortgage, taxes, and insurance will much more closely be a percentage of your income that is manageable. I recommend 25% of your take home pay.
Also, when getting written for this mortgage you should follow the below criteria to make this a healthy investment for you:
- Conventional Mortgage
- 20% down payment to avoid PMI (default insurance)
- Fixed rate
- 15-year loan
Following these principles makes the home something you own instead of it owning you. Now you’re actually living the American dream instead of a nightmare! Take charge of your life and buy a house when it’s the right time. Remember, the right thing at the wrong time is the wrong thing.
Question: What was your house buying experience like and what do you wish you would have known then that you know now? Share your story in the comments below!