Can I get a mortgage without a credit history?

By Sabrina Karl

When you apply to a lender for a home mortgage, one of the most important things they consider is your credit score. But what if you don’t have a credit history? Can you still get a mortgage?

Your credit report rates your worthiness to receive new credit by scoring the length of your history with credit cards and loans, along with your pattern of on-time vs. delinquent repayment. But for consumers who have shunned credit cards and who have never taken out a car or home loan, there is little or no information to inform their credit score.

If you’re in this situation and want to buy a home, your path will be a little trickier, or at least more cumbersome. But it’s not impossible to find a mortgage and a lender that will qualify you using nontraditional credit evaluation.

There are two main paths forward for homebuyers without a credit score: apply for an FHA mortgage or find a lender that does “manual underwriting”.

FHA mortgages explicitly allow for applicants who have a thin or non-existent credit file. In lieu of a credit history, FHA underwriting can evaluate your history of paying rent, utility bills, and insurance premiums. It also offers the ability to buy a home with a lower down payment of 5 percent or even less.

But FHA loans come with certain fees in exchange for their easier qualification terms and government backing. So if you have more than a 5 percent down payment available, you may instead want to look for a lender that offers manual underwriting.

These lenders aren’t common, but check smaller banks, online lenders, and local credit unions for this option. And be prepared to provide documentation of 12 months’ payment history for your rent and your utility, phone, and insurance bills.

Does the first-time homebuyer credit still exist?

By Sabrina Karl

One of the consumer benefits that emerged from the Great Recession was the first-time homebuyer credit. Enacted by the Bush administration in 2008, the program provided a tax credit to Americans buying their first home.

Part of the Housing & Economic Recovery Act, the tax credit was available to first-time buyers who purchased their home in 2008, 2009 or 2010. Although the credit has since been retired, you may still be in luck if you qualified with a home purchase during those years and neglected to file the credit, or you became a first-time buyer later.

If you closed on your first home between April 9, 2008, and September 30, 2010, you could still qualify. A number of variables come into play, so the best way to determine your eligibility is to consult a tax accountant.

You’ll want to consider a few things before going down that path, however. For instance, on first homes purchased during the eligible 2008 dates, the credit is not in fact a true credit, as it requires repaying it with your annual tax return for 15 years after the home’s purchase. So someone claiming the maximum $7,500 credit would repay $500 per year over 15 tax returns.

In 2009, the Obama administration revised the program slightly, upping the credit to an $8,000 maximum and forgiving its repayment for those living in the home as their primary residence for at least 3 years after taking the credit. So if you bought during 2009 or 2010, but sold or moved within 3 years, you’re out of luck.

For first-timers who bought after the program’s 2010 sunset date, you may still have options. Many state and local governments offer their own programs for first-time buyers, so researching what’s available in your area could turn up other financial benefits.

When will my first mortgage payment be due?

By Sabrina Karl

If you’re contemplating how much to stretch on a down payment for a new home, or how much of the closing costs you can afford to pay on closing day vs. folding them into your loan, you might find yourself projecting what your cash flow will be after closing. Fortunately, mortgages have some built-in good news for you there.

The day of the month you close will impact how much is due at closing. But one thing won’t change, no matter when you close: You won’t have to make a mortgage payment the next month.

That’s because mortgages are paid in arrears, meaning for the month already passed, in contrast to how rent covers the coming month. In addition, the official due date of every mortgage is the first of the month, making it a payment for the previous calendar month.

Since people close on all different dates, but mortgage payments need to be the same every month once they start, your closing process evens things out by charging you the interest required to cover the remainder of the current month. Close on the 5th and about 25 days of interest will be charged at closing. Close instead on the 28th and you’ll only owe about two days of interest.

What happens as a result is that no one owes a mortgage payment on the first of the month following closing, since you’ll have squared up already for that month at closing. In turn, that means your very first mortgage payment won’t be due until the 1st of the second month after you close.

In other words, if you close on any date in April, you’ll get to skip May and your mortgage payments will begin June 1st, giving you a little cushion of time to rebuild your cash reserves.

What is an FHA mortgage?

By Sabrina Karl

Mortgage shopping will pit you against numerous terms and acronyms that may leave you scratching your head. One you’re likely to encounter is an FHA loan, and though some 8 million U.S. homeowners have this type of mortgage, you may be unfamiliar with what it is.

A FHA loan is a mortgage backed by the U.S. Federal Housing Administration. In the same way that private mortgage insurance, or PMI, guarantees conventional mortgages for those putting down less than 20 percent, the FHA provides mortgage insurance on FHA loans.

This backing makes lenders willing to extend mortgages to homebuyers they would have otherwise turned down. Namely, FHA insurance makes it possible to secure a mortgage with as little as 3.5 percent down, and/or a credit score as low as 580 (or possibly even lower), bringing homeownership into reach for many more low-income buyers than conventional loans would serve.

FHA loans can also allow gift money to be used for the down payment or closing costs, and can be less restrictive on required debt-to-income ratios for the buyer.

Of course, there are trade-offs. The biggest is that FHA borrowers must pay two different fees in exchange for FHA insurance. First, a one-time mortgage insurance premium of 1.75 percent of the loan amount is applied at the time of closing. Second, a modest ongoing premium, ranging from about half to one percent of the loan amount annually, will be due each month for the life of the loan.

Since FHA interest rates may or may not be better than conventional rates, borrowers with ample down payment funds and a decent credit score might be better served with a standard mortgage. But if your down payment or credit rating are stumbling blocks, an FHA loan may be your ticket to getting into a home.

What deductible should you choose for your homeowners insurance?

By Sabrina Karl

No smart homeowner would risk leaving their home uninsured, and if you have a mortgage, your lender will absolutely require homeowners coverage. Still, plenty of savvy homeowners find themselves scratching their heads when it comes to deciding an important element of their policy: the deductible.

In both health and homeowners insurance, deductibles function the same way: Anytime you need or want your insurance company to foot the bill, the deductible is a specified amount you are first required to cover. By paying your share, the insurance company will then cover the balance.

Most homeowners policies stipulate either a dollar amount or a percentage deductible. In the dollar amount scenario, deductibles of $500, $1,000 or $1,500 are typically offered, though most insurance companies will accommodate higher dollar amounts, whether it’s $2,500 or $10,000, or even $100,000 for owners of multi-million dollar homes.

The other option is a percentage deductible based on your home’s value. For example, if your home is worth $200,000 and you choose a 0.5 percent deductible, you’d be on the hook for $1,000 when filing a claim.

So how to choose? Of course everyone would like to pay less to repair damage caused by a kitchen fire or a fallen tree. But the lower the deductible you choose, the higher your annual premium. That’s because insurance companies reward those choosing higher deductibles by charging them lower prices, since it reduces the small claims they’ll have to process.

So what’s important when policy shopping is to assess the premiums associated with different deductibles, and calculate how much you’d save over a number of years and how much you could cover out-of-pocket. It’s a balancing act, with unknowns you can’t predict, but the higher the deductible you can handle, the more you stand to gain over time with lower premiums.