Homebuyers with derogatory marks on their credit reports can still apply for a new mortgage, but what about those first-time homebuyers who have little or no credit at all? There is help for them, too, according to a March 16 article by Erik Sherman for The Mortgage Reports.

There are three traits that put first-time buyers “off the credit grid,” according to Sherman, making it harder for them to obtain a mortgage: They have never had a mortgage, they don’t have a car loan and they tend to use their debit cards more than credit cards.  This type of financial behavior makes it difficult for a credit profile to be created.

“Call it the unintended consequence of debt-free living: with no visible evidence that you’ve managed credit accounts in the past, mortgage lenders become (rightfully) nervous about your ability to repay on a loan,” Sherman wrote. “…there’s no history for them to go on.”

Credit report and scores

Little or no use of credit diminishes a first-time buyers’ payment history, which is the largest component of the credit score. Even so, first-timers shouldn’t run out and apply for a credit card or car loan because those who do have a credit score will likely see it decrease. According to Sherman, this is because opening new credit lines is a negative in the credit bureaus’ credit score algorithms. Also, the positive effect on the borrower’s credit score won’t help until 12 months of payment history exists for each new account.

For these types of borrowers, an FHA mortgage is a great option. Sponsored by the Federal Housing Administration, an FHA mortgage’s guidelines direct lenders to look at all aspects of a mortgage application, not just the credit profile. In addition, it allows for a smaller down payment than the more hefty 20%.

“This is good for first-time home buyers because FHA loans allow for a low down payment of just 3.5%, which can help a household with good income but less-than-optimal savings move from renting into homeownership,” Sherman wrote.

It’s available from nearly every mortgage lender, which is great because there is a large market for this type of loan according to Sherman.

“Some estimates put the number of credit-lacking consumers at more than 5 million nationwide,” he wrote.