Mortgage without a credit score? Freddie Mac offers new choices

Mortgage without a credit score: possible before, easier now

While the average credit score for successful mortgage borrowers in February 2017 was 720, (and 686 for FHA borrowers), not everyone who made the cut had great FICOs. In fact, some have been able to get a mortgage with no credit score at all.

Zero.

High credit scores improve your chances

When it comes to getting approved for a home loan, credit scores are one of the most important things.

Higher credit ratings you usually get better interest rates and more loans to choose from.

Lower scores don’t necessarily kill your application, but they do make it harder to qualify. You may pay a higher rate or have to make a larger deposit.

But what about potential buyers who don’t have a credit score?

No credit score = no problem

Your credit is one of the most important qualifying factors used by mortgage lenders. This is because your credit history and your credit scores are very good predictors of how well you will pay off your mortgage.

Without a credit score, it can be difficult for lenders to assess an applicant’s creditworthiness and ultimately whether they will repay their home loan as agreed.

Fortunately for people with no credit score, mortgage lenders can use a technique called alternative lending. FHA and VA lenders, in particular, have subscribed this way for years. This is one of the reasons for their popularity with beginners.

Non-traditional sources of credit history include:

  • Rent payments
  • Utility bills
  • Assurance
  • Cellphone
  • Personal loan with written conditions and canceled checks

Lenders check your payment history with these accounts, just like they would for a car loan or credit card payment using a regular credit report.

Manual or automated subscription

It’s great to be able to get a home loan through non-traditional credit. However, this technique has some drawbacks.

To use non-traditional credit, you must apply for a manually underwritten mortgage. Manual underwriting means that the underwriter checks the loan documentation by hand – not just by relying on software.

Most home loans these days are analyzed using a computer program commonly known as Automated Underwriting System (AUS).

Fannie Mae and Freddie Mac each have their own AUS version. Fannie’s version is known as Desktop Underwriter (DU), while Freddie’s is Loan Prospector (LP).

Ah, make decisions

Automated mortgage software can issue an “approved” decision. That means all you have to do is provide the items listed on your endorsement — like your latest pay stub — and you’re usually good to go.

The software can also issue a “Refer with caution” recommendation. This usually means that the software declined your application, assuming the information submitted was correct.

There is a third type of discovery. This is called “Refer”. When the AUS generates a “Refer” recommendation, it means that there is not enough information for the software to complete its process and make a decision.

In this case, a “manual underwriting” may be the only way to get the loan approved.

The problem with humans

The guidelines for many loans are stricter when they cannot go through automated underwriting.

For example, you may have to pay a larger down payment or settle for a smaller loan.

Automated subscribed approval, for the most part, “is what it is”. In other words, most lenders accept the AUS approval and its list of required documents.

Freddie Mac No Credit Score Option

Some of the disadvantages of manual underwriting systems may no longer apply to applicants after June 26, 2017. Some Freddie Mac homebuyers without FICO scores may be able to qualify for financing through automated underwriting.

That’s huge for homebuyers without a score. You will no longer be “downgraded” with the limitations associated with manually underwritten loans.

A little ago minor caveats associated with the approval of Freddie’s new no-score mortgage:

  • Transactions must be either home purchases or “no cash” refinances.
  • The properties must be occupied as principal residences.
  • Buyers must put at least five percent down.
  • Loans must have fixed interest rates.

If you can overcome these small hurdles, your loan experience will be much less stressful.

What are today’s mortgage rates?

By automating the assessment of people without a credit score, mortgage giant Freddie Mac continues to expand homeownership opportunities for many American families.

Lenders can now use determinations made by automated underwriting results. This is great news for many Americans who may not have been able to buy a home before.

The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.