How to Get a Mortgage If You Don't Have Credit History

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There are roughly 290 million people in the United States, and about 160 million of them have credit histories that are used to generate FICO scores--a mathematical way of predicting how likely these people are to pay their bills on time. Another 72 million are under the age of 18, which leaves about 54 million adults with too little credit history, or no credit history at all. In either case, they do not have a FICO score, explains Craig Watts, Public Affairs Manager for the Minneapolis-based Fair Isaacs Company. Fair Isaacs was the first company to develop a credit scoring system back in the 1980s. Since then, a FICO score has become one of the key factors in determining if you can get a mortgage, and how much interest you will pay.

Why doesn't everyone have a FICO score or a credit history? " A lot of people think if you don't have credit, your income must be low. Sure, there are people who fit that category. But you also can find people who are quite wealthy who don't have a credit history because they don't need credit." They might have needed it once, but not any more, which means their credit histories have become too old or " stale" to use. Some people simply refuse to use credit. If they cannot pay cash for something, they do without it. Watts says recent immigrants can fall into this category. Another group includes " people whose spouses handled everything, and then left the marriage, or died."

Young adults form a major segment of the FICO-less group. While credit card companies routinely send credit card applications to college students, there is no similar push aimed at high school dropouts, or high school graduates who do not go to college.

How long does it take to build enough credit to have a traditional FICO score? Six months. " A credit file needs to have at least one account that is six months old," Watts says. " It needs to be current, meaning that you are using it. But it cannot show that anyone listed on the account—a spouse—has died within the last six months."

It is possible to " lose" your FICO score if you don't use any of your available credit options for six months. " This happens to military personnel, people who take jobs overseas, or people who go on around-the-world cruises. They come back and find that they cannot get new credit." It can also happen to people who come into money and start paying cash for everything. These people can use whatever credit they had established before they stopped using it, as long as it was not cancelled, but they cannot get new credit until they are back in the system again.

The traditional FICO score is determined using an algorithm, or mathematical formula, that looks at 22 different factors broken into five categories. All these factors have different values within the equation, but the company will not reveal exactly what they are. The biggest category deals with your actual credit history, or how you pay your bills. It forms 35 percent of your FICO score. After that, they look at how much you owe, which is worth 30 percent. The next two categories count for 10 percent each. First is your credit mix--the different types of credit you have, e.g., an auto loan, student loans, credit cards, and so forth. Second is your interest in getting new credit cards. The more credit cards you apply for the lower your score. The last category deals with the length of your credit history. How long you have used credit—the longer the better—is worth 15 percent. This is where many young people fail the test.

The new FICO formula, called FICO Expansion, looks at areas not dealt with in the traditional FICO algorithm. Instead, Watts says, it looks at a wide range of other financial transactions that people make, such as " payment performance data on financial activities like deposit accounts, pay day loans, and product purchase payment plans. This would include book or CD clubs, and retail lay-away plans." There are other factors, but the company doesn't list them.

When someone applies for a mortgage, Watts says that lenders will first check to see if there is a traditional FICO score. " If there is none, they will then check the FICO Expansion score. We think we can produce one on about 50 percent of the consumers for whom a classic FICO score is not available."

What happens if you are one of those with no FICO score, either traditional or expanded? If you want to have a FICO score, and you will need one if you will ever want to get a home mortgage, then you have to start building a credit history. Get a bank credit card or one from a store, join a book or CD club, or buy something on a lay-away plan. Do something—anything—to get yourself into the system. Even if you don't have a FICO score now, you can have one in six months. Getting into the system may make all the difference between getting a mortgage and not getting one, and how much interest you will pay.