Do you have a credit score? Probably so. Do you have any idea what your credit score is? Maybe you do, maybe you don’t. Do you really believe that it’s totally necessary to have a credit score? Most people do, and I think they are wrong.
First, let’s take a quick look at exactly what your credit score is and why you have one. Your credit score, also known as the FICO score, was created by the Fair Isaac Company (Thus “FICO”) to estimate a person’s credit worthiness. Your FICO score is really just a number that tells people how good you are at borrowing money.
Your score is calculated using these general guidelines:
- 35% is based on your debt history
- 30% is based on your level of debt
- 15% is based on how long you’ve been in debt
- 10% is based on how much new debt you have
- 10% is based on the types of debt you have
So what do all these factors have in common? They all say “Hey baby, I’m in debt!” The higher the score you have means that lenders can trust you more highly so that they can give you more debt and they know you’re more likely to pay it back.
But what happens when you don’t have any debt? Well if you’ve been out of debt for a long enough period of time, your credit score can actually go to zero, and in my opinion, that’s a good thing. You actually CAN win without a credit score. A zero or nonexistent credit score shows that you have actually achieved something that not many people have, and that something is freedom from the bondage of debt.
When you’re free from debt you don’t have to worry about making those payments every month that drag you down emotionally, physically, and financially. You’re not paying extra for all those things you buy with credit in the form of interest and fees. You become so much more free to live life the way YOU want to live it and you end up having less stress because you’re no longer a slave to the lender.
I can hear the questions now, “But Doc, what if I need to buy a house or even a car? How would I be able to buy those high dollar items if I don’t have a credit score?” Well, buying the car is easy. If you’ve decided to make the commitment to become debt free, or if you already are debt free, saving up for a car is very simple thing. You just keep driving your present car until its paid off, then keep driving it, start putting the payments in the bank to save for the next one, and in a few short years you buy another car.
But what if you want to buy a house without a credit score? Even If you’re debt free except for your mortgage, a house can be very expensive. Of course the best way by far to buy a house is with cash, but I’m not going to nail anyone for taking out a reasonable mortgage that makes sense.
This is where the technique of manual underwriting comes in. Many people don’t know about this process, and not every lender can provide this option, but manual underwriting is what you will need in order to get a mortgage when you have a zero credit score because you don’t use consumer credit any more.
Basically manual underwriting is a nonautomated, MANUAL process of figuring out how much a lender thinks they should loan you. Normally the process is automated, they just stick your numbers into a computer and it spits out a number based on what their software says. The manual underwriting process actually has a human being running the show to determine how much they should loan to you.
However, there are certain guidelines that you’ll need to meet in order to get a mortgage that is manually underwritten:
- You must be able to prove that you’re paying 4-6 regular bills in a timely fashion over an 18-24 month time period. Those might include rent, phone, cell phone, power, water, etc.
- You should choose a 15 year conventional fixed rate mortgage.
- You must have a strong employment history and predictable personal income history.
- You must be able to put at least 20% down on the home.
- Your previous credit history should have no red flags. Even though you have no credit score, previous history does matter.
So yes, you can buy a house with a zero credit score. It’s just a different process than most people use. Of course the best way to pay for a house is to pay cash (I know some people that have actually done it), but it usually does take many years of banging away at that mortgage payment to get the house paid off and eventually pay cash for the next one.
Remember, living with a credit score, whether it’s a good score or a bad score, is a choice that you make. Do you really want to be one of those people that creditors like to see coming? Don’t get me wrong, if you’re using credit you should always be trustworthy in how you use it, so don’t start stiffing your creditors and putting your credit score in the toilet.
However, the best thing you can do for yourself and your family is to change your mindset about money and work your plan to pay off all your debts and Celebrate Financial Freedomwith the rest of us who have already arrived at that awesome destination.