Zero Credit Score: Getting Mortgage Approval

by Dee from Jacksonville, North Carolina

Ask Kate how to get mortgage approval with a zero credit score: Dee wants to buy a house but recently found out she has a zero credit score. Keep reading to learn what causes a zero score, which category your score lands in, and how to develop alternative credit when you don't have time to build traditional credit.


How Can I Get Mortgage Approval with a Zero Credit Score

By Dee from Jacksonville, North Carolina
How Can I Get Mortgage Approval with a Zero Credit Score

Kate,

How do I get approved for a home loan when I have a zero credit score? Do I use alternative credit to replace a credit report?

The zero credit score is following a separation from my husband 12 years ago. The only negatives on my credit report are hospital bills.



Ask Kate at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: Getting Mortgage Approval with a Zero Credit Score

Hi Dee,

A zero credit score is not to be mistaken as a low score.

Even so, having an indeterminable credit score makes it harder to be approved by lending institutions. So let's discuss how you might have acquired this odd score and why you shouldn't give up on loan approval.

Zero Credit Scores

If someone does not have enough information in their credit file, whether due to no credit usage or not opening new accounts for an extended period of time, they can end up with a zero credit score.

So, I am guessing in your case that there has not been any credit in your name, acquired or active, in the past 12 years. Without this interaction, there is no way to accurately rate your past credit history or predict how you will handle it in the future.

By the way, what if you'd opened and subsequently defaulted on even one revolving (for example, credit card) or installment (for example, car loan) account? Yes, your score would quite quickly become greater than zero. But, most likely, you'd find it in the category rated Poor. This is not the way to raise a zero credit score!

Credit Score Categories

Which brings up the question, how are scores categorized and what's an average score in the US?
  • Excellent: 750 and up

  • Good: 660 to 749

  • Average: 687

  • Fair: 620 to 659

  • Poor: 619 and below

Interaction with Debt

But back to zero credit scores... Just as a lack of interaction with debt can cause a zero credit score, borrowing money from institutions that report to the three major credit reporting bureaus can help to increase scores when handled properly. (Tips on building traditional credit in a moment.)

Even so, merely having excellent scores is not always enough to get mortgage approval. Here's a true story.

An 18 year old with perfect credit came to me for a mortgage. I printed her credit report and found only one 6 month old account. But because it was paid perfectly, her fledgling credit history was rewarded with an 800 score. Yet, even with that excellent score, her credit history did not reflect the required depth for mortgage approval.

So we took measures to build an alternative credit report.
Tips for Building Traditional Credit: For mortgage approval, a mix of at least three revolving and installment accounts seasoned for no less than 24 to 36 months is generally required. Don't open the accounts all at once.

Keep the unpaid balances on credit cards as low as possible so that the amount of available credit remains high. Ideally, pay the card balances off each month. Above all else, make each payment on time!

Alternative Credit Reports

As I mentioned, it takes time to build traditional credit. But if time is not on your side, you may be able to use alternative credit to obtain your mortgage approval. Here are examples of accounts that you might be able to use.
  • Rental history: A verification of timely rent can be established after the landlord fills out a form and sends it directly back to the lender. Alternately, a copy of the lease agreement and 12 months cancelled rent checks could be sufficient.

  • Banking history: This can verify that you've have no overdrafts and a past banking record of sufficient funds.

  • Utility history: This can verify that you've made timely payments with no overdue balances to utility companies, including your cell phone carrier.

Sometimes a mortgage lender will evaluate these verifications directly. Other times, they require the paperwork to be submitted to a credit agency that compiles the data into a nontraditional credit report. But not all loan programs accept an alternative credit report so discuss this with your mortgage originator.

Plan Ahead for Mortgage Approval

Of course, the best time to establish credit is before you buy a house. Plan ahead by gradually establishing a few accounts, avoiding excessive use of credit cards, paying balances in full monthly, and watching payment due dates like a hawk.

But if you do not have time to wait for a seasoned credit report, talk with your lender about using alternative credit.

Best wishes,

Ask Kate

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