Consumers applying for a mortgage loan can expect a lot of red tape. You typically must provide your mortgage lender or credit union with detailed financial information and submit to a credit check. Unfortunately, a credit check disqualifies many individuals from the home loans they need because of past mistakes or financial difficulties. For those buyers, no credit check mortgage programs offer a potential – but sometimes costly – solution.
Who Needs a Mortgage Without a Credit Check?
If you fall into one of the following categories, a credit check could derail your pending mortgage application.
- Individuals with no credit history (example: immigrants and young adults)
- Individuals with a damaged credit history
- Individuals with an inaccurate credit history
- Identity theft victims
Although The Fair Credit Reporting Act requires the credit bureaus to delete most negative credit information after seven years, seven years is a long time to wait before buying a new home. If you’re unfortunate enough to have a bankruptcy or judgment appear on your credit report, you can expect the credit damage to continue for up to 10 years or more, depending on your state’s judgment enforcement period.
For more information, read The Federal Reporting Period for Bad Debts.
How No Credit Check Mortgages Work
Getting a new mortgage without a credit check isn’t as simple as following the standard home loan application procedure with the credit inquiry omitted, and not all lenders provide this service to buyers. Legitimate mortgage lenders that do not require applicants to undergo a credit check often have even more stringent loan requirements than traditional lenders.
You can expect a full background check and thorough verification of your employment and income. The days of the “no-doc” loan that did not require applicants to submit detailed financial and background information are over. Although no credit check mortgages still exist, you can’t get approved for one without following the extensive guidelines lenders impose for applicants who wish to avoid a credit inquiry.
Higher Down Payments for No Credit Check Loans
Credit checks serve to help lenders lower the risks they incur by providing mortgage loans to consumers. The higher your credit rating, the more likely you are to repay your home loan on time and the less likely your mortgage lender is to have to foreclose on the property. Contrary to what many consumers believe, mortgage lenders want to avoid foreclosure whenever possible. If you do not allow your home loan lender to use a credit check as a risk assessment tool when evaluating your mortgage application, you must reduce your foreclosure risk another way. This usually involves making a larger down payment.
Although home loan programs exist that allow buyers to purchase homes while putting as little as 5% down on the purchase, low down payment programs do not apply to no credit check mortgages. You can expect your lender to require you to make a substantial down payment to offset its risk when it cannot conduct a credit inquiry.
Assume a Mortgage with No Credit Check
Assumable home loans are those in which you pay the homeowner a portion of the equity he has built in the home and subsequently take over his mortgage payments. Over the past 20 years, lenders have cracked down on mortgage assumptions since mortgage assumptions did not traditionally provide the lender with an adequate risk assessment method.
Fortunately, if the buyer you plan to assume the mortgage from has held the same home loan for a long period of time, his original contract may not contain a due-on-sale clause or other legalese that would prevent you from being able to take over payments on the home. While some mortgage lenders require a credit check, others lack the legal right to demand that you formally qualify for the mortgage since the original loan paperwork does not stipulate specific rules surrounding a mortgage assumption.
For more information on assuming a mortgage, read Assume a Mortgage Loan – FHA and VA Assumable Home Loans.
Rebuild Credit – The Smarter Option
Your credit history is in a constant state of flux. The FCRA requires the credit bureaus to amend your history over time. Most derogatory trade lines within your credit report must be removed after seven and a half years. In addition, federal laws give you the right to contest information you deem inaccurate or that you do not recognize.
By disputing credit errors and practicing good debt management skills, you can slowly rebuild your credit rating over time. Doing so is often easier and much less of a hassle for consumers who wish to purchase a new home than securing a no credit check mortgage loan.
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Candice Edwards - Candice Gillingwater is a credit specialist and consumer advocate currently living in Georgia. Her goal is to educate the public about ...
