It's one of the many catch-22s in our society--it takes money to make money, you need job experience to get a job, and yes--you need credit to get credit. So, how fair is it to deny people mortgages because they are too smart to get themselves in debt?!

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Well, it isn't. The reason mortgage lenders like to see a credit history, with what they call "trade lines" from a variety of creditors, is that they assume that the way you have behaved with these other creditors predicts the way that you will handle a mortgage. Without a credit history, they don't have that information. However, that doesn't mean that you can't get a mortgage; it means that you and your lender will need to work a little harder.

Some experts estimate that fifty million people don't have traditionally credit reported to credit bureaus--but still have a history of paying regular bills like rent, utilities, insurance premiums, and phone or Internet charges. And there is nothing wrong with paying as you go and avoiding debt.

Lenders aren't allowed to discriminate against you for not having traditional credit. Fannie Mae, Freddie Mac, and FHA each have guidelines that underwriters must follow when evaluating your application if you don't have a traditional credit score or history.

FHA Guidelines for Borrowers with No Credit

FHA has lenders develop or purchase a Non-Traditional Mortgage Credit Report (NTMCR) from a credit reporting agency . If you have enough credit to generate a credit score, you can't use a non-traditional report, but if you have no credit score, you can. In creating an NTMCR, lenders may use rental payment history or utilities that are paid at least every three months. You may even be able to use a record of voluntary regular payments to your savings account. So, as a wanna-be homeowner, it's very important to pay everything absolutely on time--even payments to companies like utilities that don't report to credit bureaus--because that will be counted on your mortgage application. Don't bounce any checks, and if you can set up automatic deposits to a savings account (a great way to save up your down payment, too), it can only help your chances.

Fannie Mae and Freddie Mac Guidelines for Borrowers with No Credit History

Fannie Mae requires at least four sources of credit with a 12-month history. Payments for rent, utilities, and communications (phone and Internet) are weighted most heavily and this history is required if you have it. Next, underwriters consider payments you make directly to insurance companies, for car loans, then to stores, for tuition, personal loans, child care, etc. You can't count a savings history with Fannie Mae.

Freddie Mac requires at least three trade lines (12 month history of regular mandatory payments like rent, utilities, union dues, etc.) or at least four if savings contributions are to be used as trade lines. To qualify, a savings account must have at least a 12-month history, with deposits made at least quarterly (preferably monthly) and a steadily increasing balance.

Fannie Mae estimates that five million renters without credit scores can afford to purchase a home. Don't let the lack of traditional credit keep you from realizing your dream of home ownership.