Non-Traditional Credit

One of the concerns with living a credit free life style is whether lack of credit will get in the way of home ownership.  It's a valid concern, so I thought I'd share a little bit of what we've discovered recently on the subject.  I still think most people making minimum wage ($7.25/hr) have no business buying a house.  But there are exceptions, and most people in this group will work their way up to a higher income bracket which may make home buying a good idea.  My brother is a good example and has recently started looking into buying a home, so I thought I'd share a little of his story and why he may be a good candidate for a home loan even though he's lived a debt free life style.

First I'll fess up that I'm not a good candidate for a home loan.  I'm self-employed with unstable income.  I'm only working part-time right now to provide childcare for my sister, domestic help for my parents, and focus on my creative writing career (not usually a stable field).  Living at my parents' house, while good for my situation, doesn't give me any rental history or other payment records that make for a nice paper trail.  I'm okay with that.  Home buying has not been a high priority for me.

My brother on the other hand has 10 years of work history at the same company where he started out part time at minimum wage and is now earning $12.50/hr.  He's on his third year in the same apartment.  He has an electric bill and insurance payments in his name and pays his bills on time.  He's saved enough money that he could put $6,000 towards a downpayment, while still keeping a safety net of liquid cash.

His rental history and those bills that he pays on a regular basis create something called Non-Traditional Credit.  Basically it's proof of financial responsibility showing that he's capable of making payments over time.  My understanding is that at this point most banks will only accept non-traditional credit with an FHA loan (which is government insured and has it's own special rules).

The first step towards owning a home is to do your research, so you can weigh the advantages and disadvantages.  Back in July my brother and I were able to talk to several lenders at once and get info on FHA, HUD, and Tennessee specific home ownership programs by attending the Mayor's Home Ownership Fair.  This was a local Nashville event, but you may be able to find similar events in your area.  If not, there's a wealth of information on the internet, and you can call/visit these organizations individually to comparison shop.  While some aspects of home loans will be the same or very similar regardless of where you go, it's wise to compare.  One bank wanted 4 non-traditional credit sources from us, while the other was happy with 3.  One bank only figured the estimated mortgage payment itself for us, while another estimated over all cost including insurance and property tax....this was helpful because the cost of buying a house is more than the mortgage by itself.

Over all the lenders we've spoken to have been very postive.  While a few suggested he try building credit, most said he was doing "everything right" and their eyes lit up when they discovered he was debt free.

My brother is a slow paced fellow, so he's weighing the advantages and disadvantages of home buying before he submits his loan application (to get pre-approved).  I'll try to list them in brief for you:

1. Interest Rates are very low now.
2. Home prices are down.
3. Rent prices are going up.
4. With roommates, the house could help improve his income.
5. Home Ownership is a long term investment which can yield life long benefits.  (like not being at the mercy of a landlord in your retirement years)
6. Better privacy than an apartment allows.  Less worry about noise from neighbors or making too much noise for neighbors.

1. My bro's realistic budget would only allow for an $80,000 to $100,000 loan, and the houses/neigborhoods he likes are more in the $150,000 to $200,000 range.  It seems he would have to get lucky with a short sale or foreclosure to get what he wants.
2. Home ownership carries a lot more responsibilities than an apartment, and my bro is not the handy type.
3. A house is a long term commitment.  Even if he treats this only as a starter home, he'll probably need to plan on 5 to 10 years there.
4. While there are programs that allow for a minimal downpayment, 20% or more is ideal, and my bro's current savings would probably only allow for 3-6%.
5. He just renewed his lease in August, and buying a home right now would mean breaking that lease or paying for two residences at once.

Only my brother can decide what his best option will be.  I am encouraging him to go ahead and get pre-approved, which would allow him to start looking at houses (most of the foreclosures won't let you look unless you're pre-approved) and get the help of a realtor in finding an appropriate one that fits his budget.

Whatever he decides it was very encouraging to get such a positive reaction from the lenders we spoke to and know that this is at least a viable option for him, even though the credit agencies don't even know his name.

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