Some people who are very responsible with their money and pay cash for everything may be surprised to find that they are not necessarily rewarded for their discipline when it is time to take out their first mortgage. Because lenders base your interest rate and their willingness to lend money on risk, they like to see an established payment history reported on your credit bureau.
There are programs available to those who have no credit history, as well as some ways to establish your credit if you are not planning to actually buy a home for 6 to 12 months. While there are many options available to you, a handful of the programs and best techniques for establishing credit will be discussed in more detail in this article.
Always keep your debt-to-income ratio in mind. Most mortgage lenders will not let you take out a mortgage that would push your total monthly commitments over 50% of your monthly income.
If you always pay cash you should consider opening several credit cards to start establishing credit. Also, being added as an authorized user to a friend or family member's credit card can improve your credit.
If you rent, you will want to make sure that you always pay on time and you pay with a check. Many lenders can use 12 months cancelled rent checks to help qualify you for a mortgage.
If you pay cash, try saving your monthly statements for cable, electric, and cell phone. Most utilities will not provide payment histories so it helps if you save your statements. This will allow you to build up an alternative credit history.
Using a credit supplement is a way to get trade lines added to your credit report if you have a creditor that does not report to the credit bureaus.
Many lenders can use alternative forms of credit to help in qualifying for a new home purchase. Some alternate forms of credit used can be phone bills, utility bills, etc.
If you always pay cash, try opening a small limit credit card. Use it to buy your gas and pay it off every month. This will improve your score and give you an extra tradeline.
You would think that pay cash for everything shows that you are financially responsible. The best solution is to open small credit lines to establish a credit history. Non use of the accounts will still help you establish a rating.
Some credit unions have awesome programs that will help increase your credit score.
Most lenders want to see a minimum of 3 credit tradelines on your credit report in order to extend credit to you and finance you for a mortgage. Usually, they want these tradelines to be open for at least 12 months. Therefore, paying cash for everything and not establishing credit can actually lower your chances of qualifying for the best deal and financing for yourself. Having little to no credit established does not demonstrate that you have the ability to handle repaying back debt.
You can get a mortgage even if you always pay cash and have no credit score. You will need a lender that does manual underwriting. They will want to see alternative tradelines, such as utilities and phone. The lender will most likely want to see cancelled checks for at least one year for each of these, as well as rent, to see that you pay your obligations on time. Also, you may have to make a slightly larger downpayment.
If you have close family members that have good credit you can ask them to add you as an authorized user on their credit accounts. As long as their account is in good standing it will report positively on your credit report. You do not have to actually use the accounts for this method to benefit you.
If you always pay cash as a policy, think about opening up some secured credit cards which don't allow you to charge more than you deposit with them. This will allow you to satisfy lender tradeline requirements while preserving your sound financial planning.