Step by Step: Get a Mortgage Without a Credit Score

Step by Step: Get a Mortgage Without a Credit Score

Hey, Kyle here with Today we're going to talk about how to
get a mortgage without a credit score. This is actually possible and I'm going to
show you the steps that you need to take. So, first of all, we're going to talk
about what a manual underwrite is. Then we're going to talk about how
to get a loan with no credit score. And then also a $92,000 difference
between a loan with no credit score and a loan with credit score. Okay. Okay. So first we'll we have to clear
up is there's a difference between no credit and bad credit. All right. So this loan is only for, if you
have no credit whatsoever, you've never opened a credit card or an
auto loan or anything that has debt attached to it, you've never opened. Okay. So this cannot be used to
solve bad credit, right? So if you have, delinquencies or
collection accounts, you can't use a loan like this it it place.

This is only for people who
have no credit history at all. So what's going to happen is the
lender is going to pull your credit to verify that you don't have a
credit score, alright if you have a lower credit score, you're going to
have to use that lower credit score. Now, if you don't have any credit
score, then you can move forward with four different types of loans I'm
going to show you here in just a bit. So the reason this works is
because there's two different types of underwriting. You have manual underwriting
and automated underwriting. Automated underwriting is when a
software underwrites your loan file and that's a lot easier to pass. It's a lot easier to get an approval on. A manual underwrite is when an
underwriter is manually looking at every single thing in your mortgage file. So they're verifying all of that
information and a manual underwrite requires a lot more documentation
and overall is a little bit more stressful of a process.

It's also, manual underwrites rates
are normally only for riskier loans. So people with lower credit scores,
higher debt to income ratios or, who have no credit score at all. All right. So what happens in a manual underwrite
is credit is underwritten differently, but everything else stays the same. So you still need to have
consistent employment. A consistent income,
consistent employment. You need to have funds to be able to close
if you're bringing a down payment and then the property requirements are the same. Everything stays the exact same thing
for the loan, but what's different is your credit is underwritten differently. When you're doing an automated
underwriting, you have your credit report that gets fed into the computer
software and the computer will give you an approval or denial based on your credit. With a manual underwrite,
the computer is going to read everything except for credit.

And then underwriter is going
to manually analyze your payment history in place of credit. All right. Before we move on, let's have a
quick CalmMoment because underwriting can feel super overwhelming as
you're going through this process. And especially when you're trying to
figure out your unique scenario with your finances and your credit, it can feel
intimidating to talk with somebody about the next steps, because maybe they'll give
you an answer that you don't want to hear and just know that loan officers, they
want you to be able to purchase a home. Alright. They make money when you
purchase a home and get a loan. So they are on your side. All right. So it's always beneficial to talk
with somebody, especially if you're in a place where you feel like
I'm not quite sure where I stand. What you want to do is get clear answers
instead of trying to make up a, you know, answers for yourself in your mind.

So take a moment, take a deep breath. And then go talk with a loan officer
and you can say, Hey, I'm not really sure where I stand with my credit. You know, I've maybe had some of these
financial things happen, could you help us get on a game plan so that we can have
a better picture of if we can buy a house and if not, what we need to do, what
we need to work on to get to that point in six months, in a year, in two years. Okay. So let's compare these two. So here on the left, we
have a traditional mortgage. Now this is with the automated
underwriting software. All right. Traditional underwriting,
on a regular mortgage. On the right we have a
manually underwritten loan. Okay. And again, these loans are the same, but
they're underwritten in different ways. So first let's talk about the rate, the
rate on a traditional loan is going to be lower and on a manually underwritten
loan it's higher because the risk is higher on a manually underwritten loan.

So when I priced these outs, earlier this
week, the manually underwritten loan was coming in around 5% versus the traditional
loan, which was coming in around 3%. So what that was saying is
having no credit score is going to get you a 5% rate. And having a credit score, an established
credit score is going to get you 3% rate. So you can see how much difference
there is between the two. And if you took a $200,000 loan,
that difference is $92,000. Okay. So having a credit score can save
you $92,000 on a $200,000 loan versus not having a credit score at all. Now, as far as the ease.

A traditional loan is way easier
than a manually underwritten loan. Manually underwritten loans are difficult. And the reason why is they have
a lot more paperwork to them. And you're probably going to be
expecting a longer closing time. Now purchasing power changes as well,
because on a traditional loan, you can have a higher debt to income ratio. Versus on a manually underwritten
loan, it's going to be a lower debt to income ratio. And that purchasing power
can be pretty significant. That's a difference you know, if
you're talking about from a 3% rate to a 5% rate, along with the fact that
manually underwritten loans require a lower debt to income ratio than
traditionally underwritten loans, you could see a difference of maybe on this
side, you're approved for $200,000. But with no credit score, you might only
be able to get approved for $125,000. Now those aren't hard numbers. It depends a lot on what's going into
your debt to income ratio but you can have a huge shift in how much you're
able to purchase because a lender, if they don't have a track record of your
credit, they don't want to, or they're not as willing to lend you money.

Also the speed. Manually underwritten
loans are a lot longer. So you want to expect around
a 45 day closing compared to a traditionally underwritten loan
you're looking closer to 30 days. And manually underwritten loan
can go faster, it can go slower. It just depends on the lender itself,
but normally they're going to be a bit longer than a traditionally
underwritten loan because they require more documentation and somebody looking a
little bit more closely at your finances. And then finally from an emotional
perspective, a traditionally underwritten loan has a lot less anxiety
than a manually underwritten one. Because on a traditionally underwritten
loan, you have clear answers at front from the computer software
that says if you're approved or not. On a manually underwritten loan, the
computer software basically says, Hey, we have to manually underwrite this. And then an underwriter has to
look at all of the details before you get that final approval. So it can have, you can have a lot more
anxiety on the manually underwritten loan if you don't have a credit score.

computer software

Okay. So a good way to think about this, this
difference is credit is kind of the story that you're telling to the lender. The lender is about to give you
several thousand dollars, right? Possibly several hundred thousand dollars. And what you have to do is tell the story
that you're good with paying back debt. So normally a credit score
tells that story for you, right? Your credit report is going to show
a lender how well you use debt. How do you pay it back? Do you pay back on time? How much do you use? That is going to tell the
story of how you use debt. If you don't have a credit report and
you don't have a credit score because you've never used credit, you have
to have another way to tell the story that you could pay back money, right? Because if you were going to give $200,000
to somebody you'd want to know, are they actually going to pay me that money back? The lender wants to know
the same thing about you.

So in place of a credit
report, what you're going to do is get credit references. And all this means is you're going to
find a payment history that you've already made on other accounts that aren't debt. So normally for a manual underwrite,
you're looking at three, 12-month, on-time credit references. And here's some things that could be,
they could be your rental payments. They could be a telephone bill
and they could be utility bill. If you don't have any of those,
you could look at auto insurance. You could look at, maybe accounts
that you have with other places. Anything, that's going to show that over
a 12 month or longer period of time, you can pay things back consistently,
or you can pay things to installment accounts consistently, like utility bills. Now you can't have any missed rental
payments in the past 12 months.

So if you were behind on rent,
then you're not going to be able to get a manually underwritten loan. But you can't have a max of
one missed monthly payment on some of these other accounts. Okay. And just as a side note, I have a
PDF that you can download that's going to show you a seven different
ways that you can save money on buying a house and getting a loan. You can go to to get that. Okay. So some other requirements as well. This is only for a primary
residence, so you can't get this on an investment property. You have to live in the home to get it. Also, you're normally going to
need one month of reserves in your bank account after you close. So a month of reserves is what you
do is you take your monthly payment, and that's your reserve amount. So if you need one month reserves and your
payment is $1,000 per month, then you need $1,000 in your bank account after you pay
for your down payment and closing costs.

What the lender wants to make
sure is that, you don't empty your bank account to get the loan. They want to make sure
you have money left over. And that's what the reserves are. Now let's talk about the ratios
because the ratios are a lot different on manually underwritten loans. So here I have, the four different
loan types and you can do all of these loans with no credit score. All right. So on a conventional loan, they have
a backend debt to income ratio of 40%. And no front end ratio. The front end ratio is your
proposed housing expense. So the cost of your mortgage, divided by
your total monthly debt, and I'm sorry, your total monthly income and then the
back end ratio is your mortgage payment plus debts divided by your monthly income.

So on FHA it's 31%, 43% on
VA they use residual income. They don't count a debt to
income ratio and I'll make a video on that in the future. And then USDA is 29% and 41%. Now, as far as the down payment,
conventional requires 5% down. FHA requires 3.5% down. VA 0% down and USDA is 0% down as well. So you can still put a really low down
payment, even if you don't have a credit score with all four of these loans,
you just have to keep in mind those debt to income ratios are a lot lower. So something to keep in mind as well
as you can always refinance this loan when you get a higher credit score,
so you can get your mortgage and then maybe you refinance in a year or two,
when you start having a little bit more credit history and take that higher
interest rate and lower it down a little bit, when you do your refinance.

So what you want to do is you want to
talk to a lender first about if they offer manual underwriting, don't go
through the whole process only to find out that, you know, they're going to
come back and say, Hey, we can't do the loan cause you don't have a credit score. Make sure that they do manual underwriting
with no credit score beforehand. So you can talk with a mortgage broker
who can connect you with a lender. Some others are Carrington, Churchill,
Guild, and Navy Federal Credit Union. So some steps to establish good
credit after you close on your loan, this is going to help you be
able to refinance in the future. Is number one, you want to make sure
that you pay your mortgage on time. Okay. If you fall behind on that payment,
it's going to be extremely difficult to refinance in the future. And it's going to tank the credit that
you're establishing, because getting a mortgage is now going to start you having
things on your credit report and you want to make sure all of that is good.

Remember it's about the story that
you're telling with your credit. So make sure to pay your mortgage on time. Also consider opening two credit cards
and keeping a low balance on them. What that's going to do is help
open two revolving accounts. A mortgage account is going
to be on your credit report, plus two revolving accounts. And that's going to help increase your
credit score and give you more credit history for when you want to refinance. And then what you want to
do is explore the refinance when your credit goes higher. Again, this might take anywhere from
one to two years, but that's going to help you take your interest rate that
higher manually underwritten interest rate and lower that down with refinance. Okay. So, if you want to learn more about
building credit to buy a house, because it might be advantageous for you to
build credit first, before you look at getting a no credit score loan,
this video over here is going to help you understand how to establish
credit before you purchase a home.

As found on YouTube

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