Your credit score or FICO score enables potential creditors to gauge your creditworthiness. The higher your credit score, the more confident lenders will be that if they extend you a loan, you will repay the obligation. In today’s economy, anyone who does not have a credit score inherently believes they will have a hard time getting a home mortgage.
Luckily, nothing can be further from the truth. There are some mortgage lenders that manually underwrite home loans, which do not require a credit score. Manually underwriting refers to the process of having your mortgage applications evaluate by a live person.
The process allows the underwriter to use his discretion and focus solely on the person’s ability to repay rather than the credit score. The underwriter can approve the loan based on the evidence presented in the package or ask for additional documentation to make a determination.
Qualifying alternative credit
The requirement for getting a manually underwritten loan varies from lender to lender. Most mortgage lenders require borrowers to have 4 to 6 alternative credit trade lines, such as rent payments, water bills, electricity bills or cell phone bills. Each credit trade line must have a 12 to 24- month payment history that states the account is “paid as agreed.”
Some lenders may require creditors to list each payment, the date received and the signature of the creditors/representative. The Federal Housing Administration ((FHA) requires borrower to submit a 24-month history of “Tier 1” payments. Tier 1 payments consist of rent or lease payments made to your landlord.
Down payment and terms
Borrowers who have a minimum 20% down payment stand a much higher probability of gaining approval for a manually underwritten loan. If you have less than a 20% down payment, mortgage regulations requires you to purchase mortgage insurance. However, the loan package can still be denied by the mortgage insurance company. In addition, you should be willing to accept a 15-year, fixed-rate mortgage.
Remember, the less risk for the lender– in the form of a bigger down payment and short- term mortgage—the better your chances are for approval.
You should know before presenting an offer to purchase real estate that the manually underwritten loan process is much slower than the standard mortgage loan underwriting. It is more difficult for underwriters to document, no credit score loans. The person must conduct a thorough analysis of the loan package, including pay stubs, W2s, bank statements and multi-page appraisal report, before making a credit decision. Unless you get pre-approval, it can take up 45 days to get an answer.
Other consideration for no credit score loans
Pull a copy of your credit report a few months before you plan to apply for the mortgage. This will give you the time you need to clear up any blemishes on your history. Missing payments, late payments or other negative information could be a reason for denial of the mortgage credit application.
Identify mortgage lenders that are making manually underwritten mortgage. As long as you can demonstrate steady employment for the past two years and a record of on time rent payments to your landlord, you can probably qualify for the best rate even without the credit score.
Take steps to protect yourself in case the loan falls through for some reason. For example, protect your earnest money deposit by putting a clause in the agreement that the states the “borrower must be fully approved.” Churchill Mortgage, one of the lenders that make manually underwritten mortgages, suggests that borrowers have contingency plans and avoid making 100% commitments until they receive final approval from the lender.
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