Bad Credit Series: Buying a House with No Credit Check

The holiday season is upon us, complete with millions of Americans opening up their wallets and maxing out their credit cards. You, on the other hand, don’t have a credit card because you’ve always tried to be responsible with your money. Credit cards are just a way to get sucked into an inescapable hole of debt. You paid cash for your car, maybe even skipped college for fear of amassing tens of thousands of dollars in debt.

Basically, you’ve been perfectly responsible with money. Unfortunately, when you went to apply for your very first credit line, a home mortgage, you were denied due to a lack of credit history. But you were so responsible. You never defaulted on a loan because you never had one! Why is this so unfair?

The Purpose of a Credit Check

Lenders require credit checks in order to see that you’re experienced with credit and that you can handle it responsibly. Even if you behave responsibly with your money, living in an all-cash world means that you have no way to prove it. Your credit file is empty, so there’s simply no information for anyone to go on to figure out if you’re a lending risk.

It may feel like you’ve spent your whole life thinking you were doing right only to get to the end game and not even be invited to the after party, but there is a way around this. You may be told you should look for a “no credit check mortgage,” but the reality of the thing is that there’s always a credit check when there’s a bank involved. Some just care a lot less than others.

For someone like you, nontraditional credit lines can be used to create a credit file. It’s legal and everything. If you can get letters from companies you’ve been doing business with for a long time (like the cable company, the utility company, or your insurance company) that show you’ve made all your payments on time, you’re halfway there. And you don’t even have to get a subprime mortgage for this to work!

Loan Programs for People with No Credit

Both Fannie Mae and the Federal Housing Authority have programs for people without credit scores.  These loans have to be manually underwritten, which can be time-consuming, using alternative credit lines that you provide documentation for.  Don’t get excited yet—it’s a long road, and there are lots of potholes.

Prime lenders tend to be willing to lend to someone in your situation if you have a strong work history, some money in the bank for cash reserves, and at least three letters of credit to back up your assertions that you deserve to be trusted with hundreds of thousands of dollars of the bank’s money.

But … not everyone will be able to do this.

What If You’re a Credit Untouchable?

So, you almost finished medical school but didn’t, you got a little wild with the credit cards and had to file for bankruptcy, or things just turned on you and you couldn’t afford to do much more than buy groceries for months—these things happen, and they shouldn’t be a Scarlet Letter that you have to bear forever.  

When your credit score is below 620, you have lots of open collection accounts that are not medical, and the credit you’ve managed to maintain is maxed to the limit, getting a traditional mortgage is not happening.  Other forms of credit are also likely to tell you to take a hike. This is when you become a credit untouchable.

But everything in this world is negotiable, isn’t it?

If you can’t get a mortgage the old-fashioned way, you just need to talk to somebody who has a house they want to sell and doesn’t mind taking payments.

Types of Owner Financing

If you have a decent amount of cash to put down and a savvy Realtor, you should have no trouble finding someone willing to owner finance.  Sometimes, home builders finance their own new construction projects, depending on the market in your particular location. Those are brand new homes that have been built with the goal of selling them by letting you make regular payments. But builders aren’t the only ones who can owner finance. Anyone who owns a property they want to sell is a potential source of hope.

When you approach someone to finance a property for you, you should be absolutely honest about your credit history.  If you’ve got a solid 580 because your divorce last year completely ravished your financial life, that’s nothing to be ashamed of.  But be honest from the beginning because everyone’s heard the horror stories.

There are lots of types of creative owner financing you may come across, but these are the most common and the ones that you’re most likely to find success with:

Seller-Carried First.  When the seller carries the first, it means that the seller is willing to finance the property as the first position.  They are, in essence, the bank. If your home were to be foreclosed upon by said seller, they would get all the money it takes to pay off what you owe them.  If you’ve borrowed a second mortgage, they would then have to pass anything left over to that loan servicer.

When you borrow with a seller-carried first, you get title to the property immediately, just like when you borrow from a bank.  This is the best situation for a buyer, as long as you have an eagle-eyed agent (and preferably a lawyer, too) look over your agreement.

Seller-Carried Second.  Sometimes you can get most of the money you need to borrow, but you just can’t get beyond that 80% from the bank.  This is when a seller-carried second comes in handy. In this situation, the seller of your future home will take the second position, after the bank loan that you used to raise almost all the money you needed.  In this situation, if you default, your bank gets the proceeds and then passes the remainder to the seller who is in the second position.

You also get title immediately when the seller carries the second mortgage.  Keep an eye on the terms here, though, because sellers carrying a second mortgage often don’t want to do it for long, so you may end up with a shorter term, anywhere from five to twenty years, in these situations.

Contract for Deed.  A contract for deed is a very old instrument that sellers and buyers have been dancing around as long as there have been Realtors and deeds.  Under a contract for deed, you and the seller enter into a written agreement and have it registered and recorded with your county.  The agreement will include what you’re responsible for, what the seller has to maintain, how much you’re obligated to pay, and so forth.  

But you don’t technically have ownership of any kind until you’ve made your very last payment.  You can think of yourself as a Super-Renter, if that helps any. This type of financing used to be the norm, so don’t assume it’s a bad deal just because that’s all a seller can do to help you out.  If they still have a mortgage on the property, it could be that their bank won’t let them owner finance any other way.

Lease Option.  This is not a type of owner finance, despite what anyone tells you.  A lease option is exactly what it sounds like. It’s a lease for a period of time, after which you have the option to buy the place for a set amount outlined in the contract.  You get “first right of refusal,” but beyond that you don’t get anything by default.  

If you’ve negotiated a set amount of your monthly rent to go into escrow for a down payment at the end of said lease, then you can count on that funding to be applied to your sale.  If you just assumed you’d have something like that waiting, you’d better go read your contract again. There’s nothing guaranteed about a lease option besides the lease and subsequent option.  You don’t get title in the beginning or possibly ever. Even so, it can be a good solution to your housing woes.

Wait, What About Cash Buying?

Every once in a while, a Realtor or a seller gets really lucky and they happen to meet someone who has enough cash to buy a property outright.  These are the ultimate no credit check situations. The contracts are thin, the closing costs are low, and the wait can be as little as about two weeks—just long enough to get the title work back.

You—you fabulous peacock—will go to closing and open up a briefcase stuffed with $100 bills and it’ll all be done.  Just like that. Well, not like that, exactly. Because of the Patriot Act that was passed back in 2001 and its changes to the Bank Secrecy Act of 1970, all cash that moves through a closing company, bank, or other financial institution has to have a paper trail.  

Sorry to burst your bubble, but you’re gonna need a cashier’s check.

Unless fulfilling your dreams of walking around with a briefcase chained to your wrist was the main motivation for buying a house with cash, this is the ultimate, all-around low-hassle way to go about buying a house without a credit check.

Different Solutions for Different Financial Circumstances

Depending on the reason you want to avoid a credit check when buying your next home, you have options.  If you simply have no credit, you can work with a lender that does manual underwriting and get a mainstream loan as long as you have some proof that you pay your non-credit-bureau-reporting bills on time.

If your problem is deeper and you have enough cash in hand for a reasonable down payment, owner financing may be the right option.  You’ll probably have to work closely with the owner for some time, but you both can benefit from these arrangements.

Lastly, there’s no better way to avoid a credit check than to simply not need one because you’ve got a vault full of dollar bills that you like to swim around in like Scrooge McDuck. Or maybe you just got an inheritance or a settlement, or you’re just really good at saving.