Possibilities of Mortgage with incalculable Credit Score

Question

I am 23, and I'm following Dave Ramsey's TMM plan. I am concerned, however, about completely closing credit accounts etc. due to the fact that I am not yet a homeowner. I do not want to dig myself into a hole I cannot get out of. Dave Ramsey says credit scores do not matter in life if you pay everything with cash.

I agree with this for cars, clothes, and things, but there is no way I can work long enough to pay for a house. He suggests saving 20% (no problem) to put down on a mortgage. My question is : what real, viable, and practical options do I have when it comes to getting a mortgage without a credit score? Should I be working my score up, or disregarding it and letting it become incalculable as Dave says? I don't want to follow any plan blindly, so I'm just doing more research.

Answer 1

credit scores do not matter if you pay everything with cash

1. Even if true, there are a few things that it makes a lot of sense to borrow for, most notably, a house. Sure, you could save your money until you have enough cash to buy outright. But the whole time you're doing that you're paying rent on an apartment. Or perhaps living with your parents, or in a homeless shelter, or a cardboard box under a bridge, or some other undesirable situation.

   Don't get me wrong, I strongly believe in avoiding debt. But buying a house is a special case because by buying the house you avoid the expense of renting. If you don't have a working car and need a car to get to work, it is not unreasonable to borrow money to buy a car. If the alternative is that you will lose your job because you can't get to work, this is a sensible course of action. I think it's a very bad idea to borrow money for a vacation or any other form of entertainment.

2. It is simply not true that if you pay cash for everything that you don't need a credit score. Landlords today routinely check your credit score before renting an apartment to you. They want some evidence that you will actually pay the rent now and then. Many employers check your credit score as an indication of how responsible a person you are.

   And it's always possible that you will have some emergency that leads you to be willing to break the usual rules. Like if one of my children had a terrible disease and there was a large bill not covered by insurance, I can't imagine that I'd say, "Dave Ramsay says not to borrow money, so I'm just going to let my son die rather than get this life-saving operation because I don't have the cash on hand to pay for it."

In practice, it's a good idea to make some effort to keep a good credit score. Even if you have no plans to use it, it doesn't hurt. I'd advise any young person to get a credit card, use it to make a few purchases here and there, and then pay off the card 100% every time you get a bill. Personally, I use credit cards regularly for the convenience of not having to carry cash or worry about getting checks accepted.

If you find that you just can't deal with credit cards responsibly, that you go crazy and buy things you can't afford just because you have the card, and then a couple of days or weeks later you are kicking yourself for this stupid, unnecessary purchase, yes, then you should get rid of your credit cards. I'd put that in the same category with, If you can't have just one glass of alcohol and stop, but any time you have one drink the next thing you know you are waking up with a hangover in a gutter in a pool of your own vomit, then maybe you should stop taking that first drink and quit hanging out in bars. But if you can have one drink with friends at dinner and then stop, there's nothing wrong with that one drink. Etc for numerous other things in life.

Answer 2

Mortgage lenders do not just look at credit score -- they also consider your income (eg, paystubs), your assets (eg, bank statements), payment history (eg, utilities), etc. Credit score is just one factor.

So you can get a mortgage without a credit score -- see Can You Get a Mortgage With No Credit History? on nerdwallet -- but you may find it more difficult to get approved, and at a higher interest rate than if you had good credit.

Answer 3

I highly recommend you use a site like Credit Karma to track your score and see the impact of your $10,000 balance. No answer here discussed the nature of a credit score, its composition, and what you can do to improve it. Your score is being impacted by utilization. This is simply the amount owed vs your total credit line.

When I recently applied to renew my HELOC, I saw my utilization was high for the fact that I run most of my budget thru my credit cards. For the next few months, I paid the bill in full, and then some, before the balances were reported. An 850 credit score got me the loan with a 10 minute phone call and copies of my 401(k) and IRA statements. Gaming the system took me from a respectable 790 to the maximum score. In your case, paying the $10K off will put you well over 700.

Note, my credit report still shows accounts I closed in late 2008. If you really wish to go off the grid, there’s a decade delay.

If you are really planning to do this, I suggest you try a few things first -

• rent a car without using the card
• reserve a hotel room without the credit card
• ask your bank what they will do for you if you buy something with your debit card and find the business closed before they shipped your item.

People can, and do, mess up with their cards. I am certain that if a card user starts with one rule, “do not charge any item that you don’t have the cash to pay in full the day the charge hits” that they will fall into the group of responsible card users who use it to their advantage. No different than the cook who knows how to use a cooking knife vs those who slice into their hand while cutting a bagel.

The celebrity and entertainer Dave Ramsey has a view that cards have no responsible use. Clearly, our opinions differ.

Your comment response "buying within 5 years with 20% down," reinforces my opinion that your best path is to simply continue with your plan. Paying the card aggressively will let you be done with it well before you apply for the mortgage.

Answer 4

Maybe search some active personal finance forums or subreddits and try to find people who have actually gotten those small, personal, no-creditscore-needed mortgages in the last 10 years. I would wager those people are unicorns.

I tried to get one a few years ago and it was going to be a major uphill climb. Getting a mortgage with a good credit score was still no cake walk. I asked our mortgage broker about the Ramsey approach and he mentioned it may be possible, just like building your own car from parts and raw materials is possible.

But, you know there are other things I want to do with my time.

Ramsey has a wide dogmatic streak I found to be a turnoff. He has some excellent points but it's all information you can find in numerous other sources.

BTW, his method of paying off your smallest credit card first, no matter the interest rates of other debt you may have isn't great advice either, in my opinion. It's a neat idea for people who truly struggle with personal finance or like buying into a catchy system. However, it may (likely) cause you to pay more interest than attacking other debt with a higher rate.

Answer 5

Work the debt snowball, get rid of the debt and feel great and be free! I did.

I have no current open credit accounts other than my mortgage and old credit accounts (7 or more years old) that are closed paid as agreed, no late payments etc. I have a credit score of 750.

I understand that this is not your situation as you are worried about not having much credit on your credit report after paying everything off.

Dave talks about Manual Underwriting, in which manual means it's not an automated calculate my score and make a yes/no decision, but a human underwriter actually looking at your credit worthiness, possibly ignoring lack of credit accounts. There are companies that do manual underwriting. Probably not the large banks or highly advertised online quick/fast mortgages, but there are those that do.

Also consider finding a smaller local bank or Credit Union and going in and talking with a loan officer to see if there is a more manual process that is not a yes/no based on FICO.

As long as you don't have bad credit (late payments, over extensions, collections, etc) and have whatever proof they request (satisfactory rent payments, satisfactory salary etc) then you should be OK.

I don't do it, but I wouldn't begrudge someone (Dave would) that had one credit card that they used sparingly and always paid in full every month for the sole purpose of building credit. But this could be dangerous depending on your spending habits and personal traits and behaviors. That's what the TMM is aiming to change.

Answer 6

His policy of only paying cash only makes sense if you can't trust yourself with having credit available.

Having a credit card that you pay off in full every month is categorically superior to always paying cash--the only reason not to do this if you are tempted to spend more than you can pay off.

There are simply too many cases where having a credit card is simply useful and there are also the various rewards. Not to mention that in some places it can influence your insurance rates. (Fundamentally, credit ratings mostly measure how careful you are. It's not in the least surprising that there's a relationship between your credit score and how likely you are to be in an accident.)

You do not need to pay interest to have a good credit rating. Our credit ratings are around 800--and there's not one cent of interest ever paid on anything that still appears on our credit reports.