If you want to apply for a home loan, but are currently unscoreable, there are ways to build up your credit file. But it may take six months to a year.
Dear Keeping Score,
We are trying to secure a mortgage loan for a house we love, but my husband’s credit report is showing up as insufficient credit history.
In September 2018, the credit agency made a change to show his only debt paid off, and eight days later the agency decreased his score from 544 to 0! We have no bankruptcies, no judgments, no derogatory marks, no collections, etc. We have 30 percent down payment (no monies borrowed) and long-term employment (30 years with the same company).
How can we have such a hard time buying a house with no debt, a large deposit, secure income? We are 50 years old and cannot purchase a home now because we chose to live without debt. We are even willing to pay a higher rate to get the loan and refinance later down the road. –Ronda
Welcome to the daunting world of computerized and securitized lending. I can hear the frustration in your question, and I understand. Living a debt-free lifestyle has its downsides, something that mass market personal finance gurus fail to highlight when selling their wares. But let’s make some sense of what has happened and, more importantly, give you some real-world advice that will help.
Today’s lending process is very efficient and non-biased for the majority of borrowers. Race, gender and religion do not factor into a credit score. It wasn’t that many years ago when a woman couldn’t get a loan without her husband’s approval and having a tattoo was grounds for declination. Not anymore, thanks to the Fair Credit Reporting Act.
Being blind and impartial, computerized lending decision-making eliminates discrimination and has lowered the cost of loans for millions of consumers. Because standardized loans can be graded, packaged and easily resold to investors, banks can lend more often and at lower market rates. But your case doesn’t fit the computer model, so you need to either build credit or find a lender who is willing to manually underwrite your loan and keep it in the lender’s portfolio rather than resell it into the secondary market.
How to build up credit from scratch
In Chapter 2 of my book, “Credit Repair Kit for Dummies,” I explain that in order to generate a FICO score there must be at least one account that has been open for six months or longer and one account that has been updated in the past six months.
From what you tell me in your question, it would appear your husband paid off his only account in February or March of 2018. When no other data was received during the following six-month period, his file became virtually inactive and was unscoreable.
It does concern me that your husband started out with a score of 544, which is not a great score to begin with. You mention “no bankruptcies, no judgments, no derogatory marks, no collections,” but what about late payments? Payment history makes up 35 percent of the total score, and if the account was often paid and reported late (but not late enough to go into collections), that might account for the lower score.
Let’s first look at a way to build your husband’s credit score by beefing up his credit file. The best way to do that would be to get some new credit in your husband’s name.
- If you have decent credit on your own, you could add him as an authorized user to your credit cards. This would enable him to piggyback on your credit history going forward. Your payments would count on his credit file as well.
- A second alternative would be to look into a secured credit card or consider a passbook loan. Both of these are good options because you use our own money to “secure” any purchases and you don’t rack up new debt. You will want to be sure that the lender you choose reports your payments to all three credit bureaus.
- You will also want to be extra diligent about paying the monthly bill on time, every time. Unfortunately, these options will take a little time; remember what I said above about accounts being at least six months old? It would seem that time is not on your side since you have found the house you want now. Realistically, it would be better if you could wait six months to a year to resolve this issue.
See related: Credit scores are rising: How not to get left behind
Other home financing options
If you are determined to go ahead, you could consider buying the home in your name alone, using his income along with yours to qualify. This would require you to have a decent credit score. I wouldn’t normally recommend this to a younger couple because of the possibility of a divorce down the road. But at 50, I’m hoping you’re in a stable long-term relationship. This is not an ideal solution and you may need to brace yourself for a higher interest rate, although it seems you are OK with that prospect for now.
Another suggestion is to try the manual underwriting route. Manual underwriting means a lender will take a very close and personal look at your finances, just like the old days. Reams of information, such as tax returns and evidence of income and expenses and the like will be needed. You will need a good-sized down payment, but you appear to have that already. Be ready to show you have some significant liquid savings to back you up in case of a reversal of fortune that might hurt your ability to make loan payments.
You could also look into an FHA loan, which is backed by the federal government and generally has lower credit score requirements. You can get an FHA loan with a credit score as low as 500, and you may also qualify if you have a thin or nontraditional credit history, as long as you’re able to meet other criteria.
Finally, if none of the above work for you, as a last resort you might take a look at hard money lenders for a short time while you are building your credit. The cost will be higher than a conventional loan, but it may provide a quick (but potentially riskier) and hopefully short-term solution to your situation until your husband builds a credit file and score.
New tools for thin-credit-file consumers coming this year
Millions of Americans are either unscorable or have what is known as “thin” credit files that make automated lending difficult. Experian and FICO have teamed up to offer two new programs that allow consumers to selectively add new scorable data to their files from things like utility bills, cell phone payments and banking activity to their credit files. These new products – Experian Boost and UltraFICO – aim to allow people just like you to qualify for less expensive and easier-to-get financing, and should be available in 2019.
Remember to keep track of your score!