No Credit Can Be Cause For Poor Credit Scores When Applying For Mortgage

This BLOG On No Credit Can Be Cause For Poor Credit Scores Was UPDATED On May 25, 2017

No Credit Can Be Cause For Poor Credit Scores when applying for mortgage.

  • No Credit Can Be Cause For Poor Credit Scores: No credit is the reason why consumers do not have credit scores or may not have three credit scores from each of the three credit reporting agencies.
  • Often times mortgage applicants  wonder why their credit scores are so low when they pay all of their bills on time and are responsible on their finances. 
  • A perfect example of No Credit Can Be Cause For Poor Credit Scores is a borrower called me the other day because she could not qualify for a mortgage loan from her local bank because her median credit score was 560.
  • She just could not understand why No Credit Can Be Cause For Poor Credit Scores and could not understand why her credit scores were low.
  • She thought about hiring a credit repair company to repair her credit and increase her score. 
  • She has no recent collection or charge off accounts, makes good income, has plenty of assets, but has no active credit tradelines.
  • She thought of hiring a credit repair company to raise her credit scores but the problem with hiring a credit repair company is that she has no credit to repair.

Reason Why No Credit Can Be Cause For Poor Credit Scores

Many consumers who do not have any collections, charge off accounts, and late payments in years but their credit scores are still low.

  • Reason for low credit scores with no derogatory credit items is because of not having any credit accounts.
  • Many consumers who went through bankruptcy and/or foreclosure think that not getting any credit is the best for them.
  • This is absolutely not the case. Whether a consumer uses credit or not, they should have active credit.

Here is the case scenario from earlier:

  • I ran her credit and have seen a few bad credit items like older collection accounts and creditor who charged off past collections from many years ago which should have no bearing on her current credit scores. 
  • Borrowers do not have to pay off outstanding collections and charge off accounts to qualify for FHA Loans.
  • The older the collection account and charge offs are, the less of an impact it has on a borrower’s credit scores.
  • She did not have any recent collections,charge offs, or late pays in years.
  • The date of last activity on her credit report was from 2007. 
  • The problem I see in cases like these is that the mortgage loan borrower has no credit active credit tradelines, therefore, they may not have any credit scores.
  • No credit can definitely decrease credit scores even though all monthly bills get paid on time, it will have no impact on consumer credit scores if creditors do not report them on consumer credit report.
  • Lenders use prior credit payment history as a reflection of credit worthiness.
  • Low credit scores can be reasons for denials for mortgages, automobile loans, and other installment loans.

Lender Overlays On Credit Tradelines

Credit Tradelines is not a requirement under HUD 4000.1 FHA Handbook Guidelines. Most mortgage lenders have lender overlays on the credit tradelines. Lender Overlays are additional mortgage guidelines that are above and beyond those of FHA, VA, USDA, Fannie Mae, and Freddie Mac.

  • Having a minimum amount of credit tradelines is not a FHA, VA, USDA, FANNIE/FREDDIE Guideline but it is a lender overlay on the particular lender.
  • Borrowers do not need minimum amount of credit tradelines to qualify for home loans. 
  • However, lenders normally want to see a minimum of three credit tradelines that has been seasoned at least one year.
  • There are other lenders who have overlays on credit tradelines where they require two year seasoning requirements on credit tradelines.
  • The Gustan Cho Team specializes in helping borrowers qualified for loans with no lender overlays.

Why Mortgage Companies Require Credit Tradelines

  • Borrowers who have no credit scores on their credit report can instantly get a credit score by having credit tradelines.
  • The easiest and fastest way of obtaining and re-establishing credit is through secured credit cards. 

What Are Secured Credit Cards And How Does It Work?

Secured credit cards are regular credit cards but the credit card holder needs to put a deposit with the secured credit card provider. The credit card provider will issue a credit limit equivalent to the amount of the deposit the consumer makes. For example, if the consumer makes a $500 deposit, the credit card provider will issue a credit limit of $500.

Here is how secured credit cards work:

  • Secured credit cards can boost a consumer credit scores instantly.
  • The easiest and fastest way of establishing or re-establishing credit after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale or periods of bad credit is by getting three secured credit cards.
  • $500 credit limit is recommended on secured credit cards. 
  • Any credit limit lower than $500 credit limit will have little impact on raising credit scores.
  • Payment history is reported by secured credit card companies.
  • Even though the credit card provider has collateral from the consumer, a 30 day late minimum payment will be reported on credit report and any derogatory credit information will remain on credit report for seven years.
  • As the credit card consumer develops a good payment history, the secured credit card company will increase the credit limit without requesting additional deposit.
  • Once consumers have at least a year year payment history with their secured credit cards, they will be eligible for unsecured credit cards.

What Are Non-Traditional Credit Tradelines?

Mortgage lenders that do not require 3 credit tradelines  can use non traditional tradelines in lieu of traditional credit tradelines. Non-Traditional credit is credit by creditors but the creditors does not report the tradeline on consumer credit reports.

Examples of non-traditional credit tradelines are the following:

  • Rent payments
  • Cellular phone bill payments
  • Other monthly payments that the creditor does not report on the credit bureaus. 
  • It is extremely important that when you pay your monthly rent, that you pay it with a check because the lender will require copies of cancelled checks to verify that you have made your monthly rent payment on time. 
  • Same goes with paying all of your other bills like you utilities, cell phone bills, and cable television bills.

Home buyers want looking to qualify for a mortgage and credit scores are below 600 due to not having active credit accounts can contact The Gustan Cho Team at (800) 900-8569 or text Gustan on his cell at (262) 716-8151 for faster response and get qualified for a mortgage. We also help in boosting credit scores and helping our borrowers in re-establishing their credit. We are available 7 days a week, evenings, weekends, holidays via phone or email us at gcho@gustancho.com.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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