by Dale Rogers
Many working people in the U.S. have no established credit, but want to own their own home. They never held a credit card or bought a car with installment payments. There is no credit score with any bureau. It’s almost like they are leaving ZERO financial footprints as they traverse through life. Almost certainly, large deposits need to be paid to secure basic services such as water, electric, phone, etc. This particular segment of the home buying public is a throw back to the way business was conducted a 100+ years ago. Other than Sears and Roebuck and small home savings banks a credit report with scores didn’t exist. The credit grantor would size you up see if you were a good bet. You needed a job and would need to demonstrate some community stability coupled with a good down payment then an arrangement could be made for you to buy. The small savings and loan companies granted mortgages based on savings deposits of your community of neighbors. There wasn’t any secondary market to sell the newly originated loan. I recall having to postpone a home sale in the late 1960’s because they were waiting for a payoff on a house that had sold. When that sale closed, the buyer’s were able to go ahead and fund their new loan by the freed up money. Credit crunches were prevalent before the secondary market came into play.
As mortgage financial markets have evolved they primarily were geared to a cookie cutter segment of the market that had established credit. Politically, banks and lenders were buttoned holed and urged to work toward establishing mortgage programs for people who had no established credit, but had a job and some how met their financial obligations every month. Their rent, insurance, groceries, phone, water, sewer, car repairs, gasoline, doctor and dentist bills were paid every month. As an added incentive community investment credits were offered which would be beneficial in the eyes of bank and lending regulators as lenders pointing to those institutions who were helping this community home buying segment and could then make a case for their Federal and/or State charter renewals. It turns out to be a strong incentive to offer community based lending to working people who want to buy a home and have no recorded credit.
So how might this work for a working person with no credit and who wants to buy a home. First, there would be an effort to determine their current housing history. If they have been renting and paying said rent in cash an effort would be made to document the pay history of the rent by way of a Verification Of Rent, called a VOR in the lending trade. The most weight is given to one with a professional manager in place such as an apartment community or Realtor managed property. Verification Of Rent directly from a private individual where cash is exchanged is a bit more of a challenge. However, falsifying a document (VOR) in order to get rid of a bad tenant carries heavy penalties for the landlord. Other types of bill paying would be verified and is called Alternative Credit verifications. Letters from utility companies indicating on time payments of electric, phone, cell, water and such could form a further basis for building an Alternative Credit file. Sometimes potential buyers of a home live with relatives and have no rental history. This too, can be addressed. The other aspect of these community based lending programs is the verification of a job or business or other means of income. This can be done with pay stubs, business bank statements (if available but not required for the self-employed) or what ever means available to verify the existence of some type of employment income. State or city occupational licenses are sometimes used. Verification Of Employment is another way to show periods of employment and income whether it is W-2 or Miscellaneous 1099 income. The whole point of this collection of information is to try and build an Alternative Credit file, which can be utilized to make a lending decision. Just like in the old days, these files are hand underwritten with a human being pouring over all the documents. It is truly common sense lending. Many of these loans require some type of investment on part of the borrower. It could be as little as ZERO, $100, 2.25% or higher down payments. Some borrowers do not have any bank accounts and operate on strictly cash basis. Check cashing services with free money orders is their bank. Lenders call cash on hand as “mattress money”. Lenders can handle this scenario as well. Sellers can pay all or most of the closing costs for buyer/borrowers per lenders.
With all of this gathered, Neighborhood Lending Programs, FHA (although some automatic underwriting now-but hand underwriting available), VA, do not require credit scores. Utilizing Alternative Credit a borrower with a job and NO CREDIT can buy a home with a little work. Even those known as undocumented workers can buy. If there are collections a credit repair program will be required to payoff those collections.
About the Author
Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.
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