Actually Getting a Mortgage With no Credit Score

Earlier this year I wrote about the hypothetical process of getting a mortgage with no credit score. Now that we have lived through that process, and have finally closed on selling our old house, I want to document what it actually looked like.

I hope someone out there went through this process recently and can say they had a better experience. Maybe there was a different lender that was easier to do this through, or we completely missed something or were misinformed by our lender about the process. I really wanted to believe this would be easier than it was.

I've debated using real or hypothetical numbers, and have landed on just using the real numbers where it makes sense. Property records are public, and you can see them on county assessor websites as well as aggregators like Zillow, so there is no point in hiding those numbers. It's also known by those who know us that we paid our house off four years ago, so it would be known that we are talking about 100% equity here as well.

We listed our house in TN for $305,000. We had not sold it as of closing on our new house (a detail I will cover shortly), but we had an accepted offer for $310,000 by the time we left the state.

We were looking for houses in TX under $400,000, and ended up purchasing our house for $389,000.

When selling a house, it is common for 6% of the purchase price to go to the realtors - half to the buyer and half to the seller. The maximum we could have seen from the sale of our TN house would have been $291,400 after paying out commissions. Because of various other fees and closing cost agreements with the buyers, the number we finally got was a few thousand less, and I will leave that number private. Let's round it to $290,000.

If we could have sold our old house first, we would have needed to finance at most $99,000, or about $49,000 after our down payment.

For reasons I will explain in this post, we had to finance the whole thing - about $349,000 after down payment.

The Loan Process

We ended up using Churchill Mortgage to get a no-score loan. There might be some other banks out there that still do this, and I wish I had spent the time to shop it around. I did, just for kicks, try the heavily marketed Rocket Mortgage - they require a credit score.

When we first engaged with Churchill, they required the following documentation from us:

• Paystubs – copy of your most recent 30 days of paystubs. Since I changed jobs, I had to provide stubs from my previous employer as well.
• W2’s – copy of the previous two years
• Bank Account Statements - copies of the most recent 2 months bank statements for the accounts (all pages of each month). I had to provide updated statements throughout the process.
• Retirement Statement - copies of the most recent 2 months statements for the accounts (all pages of each month). I did not have to supply updated versions of these later.
• Drivers License
• Copy of current homeowners Insurance and property taxes
• Copy of current HOA documentation
• Documentation showing 12 months of payment of property taxes or homeowners insurance
• Documentation showing 12 months of payment for another tradeline like car insurance, phone bill, etc.
• The purchase price range we were looking at, so that we could get a pre-approval letter
• The amount we planned on using for a down payment. In our case, this was 10%

We decided to apply for the loan only in my name. For all of our house purchases, we've made sure that we could make the payments using only my income, leaving my wife's income as a bonus on top. This greatly reduced the amount of paperwork I had to supply, but did cause a few headaches later on.

Once we had all of this information, we were able to get a pre-approval letter for purchasing a $400,000 home.

When we found the house we wanted to purchase, we additionally had to supply the following:

• Proof of what the taxes are for the new house (aside: TX's residential tax rate is about 4x that of TN)
• Proof of insurance for the new house
• Documentation on any HOA in the new neighborhood

Closing did not go as smoothly as I would have hoped. During the process, there were a few gotchas that came up that I wish I had known beforehand. Also, Churchill missed our closing date by one day, and the one pleasant surprise in all of this is that they have a policy of paying their fees (about $1,500) if they miss the closing.

Gotcha 1: Tradelines Must be Unbroken

One huge gotcha that I learned about since writing earlier this year is that in order to be manually underwritten, at least at Churchill, your tradelines have to be continuous for the past 12 months. Your homeowners policy, cell phone bill, electric bill, etc, cannot have a gap. I was told that maybe if I changed cell phone providers, I might be ok, but it was strongly suggested that I didn't.

The real gotcha here though is that if we sold our house in TN before purchasing in TX, it would break all of our tradelines. This meant that we might have been able to close in TX within 30 days of selling in TN, but beyond that, we would have been stuck without being able to get a mortgage for 12 months using this process.

Let me be clear: as it was explained to us, if we sold our old home first and not quickly closed on the new one, we would not have been able to qualify for a zero-score mortgage for another year. If anything went wrong in the process, we likely would have resorted to renting, a process that also usually requires a credit score.

This is why we had to finance $349,000 and could not count on the proceeds of our old home to get a much smaller loan.

Gotcha 2: Employment

I was somewhat worried about being able to qualify since I made a major job change a few months ago. Thankfully, since I was a W2 employee in my old job and was still a W2 employee at the new place, and that the type of work I was doing was similar, and that I got a decent raise at the new place, this was not an issue. But if I had changed my line of work, or had gone 1099, this would likely have prevented getting a mortgage for a year after changing jobs.

Churchill did contact both my previous employer and current employer to verify employment status. My new leader did inform me of this, because I was supposed to list our HR department for verification instead of him.

Gotcha 3 : Sufficient savings

I learned about this from someone else I know who was applying for a mortgage with Churchill this year. They were told that they needed 13 months worth of mortgage payments in the bank (I am not sure if this is P&I or if that also includes PMI and escrow). Being a bit younger than us and following the "baby steps" to a T (being in step "3b"), they did not have significant savings beyond their down payment. In our situation, our retirement funds were more than enough to pay many, many years of payments.

I believe this was in part why Churchill wanted to see our retirement statements - to make sure that we had sufficient funds that we could make monthly payments, even at the expense of having to touch retirement funds early. We also had enough money in our car fund and emergency fund to cover a couple years of payments (including taxes) as well.

Gotcha 4 : Debt to Income Ratio

We came into this process with zero debt. But, the mortgage company needed to compute our D/I ratio for after our loan was funded. What I did not realize is that they also want to calculate your total housing expenses relative to your income. We came to find out pretty late in the process that the number Churchill used was 28%: if you total up all of your hosing expenses, including taxes, insurance, and payments, that has to be less than 28% of your gross income. Also, since we could not sell our TN house first, for reasons mentioned above, this included expenses on our TN home, including keeping the lights on and keeping it insured.

I also learned through this process that our insurance provider charged about 15% more to maintain insurance on an unoccupied house.

Very late in the process, a week before we were supposed to close on our TX home, Churchill asked us for a copy of our HOA invoice for TN. After putting that measly $20/mo amount into the formula, it took us to just slightly above 28%, which would have derailed the whole process. The suggestion that our loan officer gave us was to adjust our insurance deductibles. So, I changed the new home to have a $5,000 deductible. That was crazy, but I was told I could change it after closing, which I did right after we walked out of the title company's office.

Now, if we had used my wife's income, the $20/mo would have not mattered. Regardless, the fact that we learned about the 28% number so late in the process was extremely annoying.

It turns out that the 28% number is quite common: The Fool, Investopedia, Quicken Loans.

Gotcha 5: Interest Rate and Term

It turns out that for a zero-score loan, the terms can be horrible. For one, we could not qualify for a 15 year loan (see: 28% rule, and not being able to sell our previous home and use that equity). We could only qualify for a 30. Thankfully we were able to get a "conventional" loan with just 10% down, and did not have to deal with some of the restrictions associated with FHA (such as not being able to recast).

The interest rate also was horrible. I was seeing 30 year mortgages with 2.6% for people with good credit, and 2.8% or so for people with a 660 score. The rate we got was 3.5. I was not too worried about that rate since 1) I knew I would be rolling our equity into the loan and 2) we were not intending to keep this loan around for 30 years.

The friend of mine who was also looking at Churchill but was denied? He was quoted 4.375%.

The final horrible term was the PMI. Our PMI came out to about $450 per month. If we did nothing to reduce the balance, that is $5,400 per year just down the drain. Again, I knew that once we rolled equity in to this new loan that would go away, so we would end up paying it for two months tops, but... wow. If we had been able to sell in TN first and then close in TX, this never would have been an issue. We would have only borrowed about 25% of the new home's value, not 90%.

Gotcha 6: Unlikely to get a Bridge Loan

A bridge loan is a short-term loan designed to provide financing during a transitionary period, such as moving from one house to another. Homeowners faced with sudden transitions, such as having to relocate for work, might prefer a bridge loan to the help with cost of buying a new home.

https://www.bankrate.com/mortgages/bridge-loan/

Early in the process, someone suggested that we get a bridge loan to have enough funds to get to the 20% down payment point. We did have enough money set aside to make the actual move - paying for the moving truck, to have movers load and unload our stuff, and some of the other surprise expenses ($500 to register our two vehicles in TX!), but we did not have enough to avoid the PMI.

Later in the process we were told that since we did not have a credit score, the option of getting a bridge loan or a HELOC was likely not going to happen.So, if you thought that you could temporarily extract value from your home in order to make a larger down payment, that likely is not going to be possible without a credit score.

Up Next: Recasting

Churchill is just a loan originator. They do not actually service their loans, so we are waiting for the transfer to be completed. It is going to a bank I have never heard of before, whereas our previous homes had loans sold to major national banks.

Earlier this year I learned about something called a "recast". This is not a refinance. It can be done after making a large payment, and re-calculates your principle+interest payment based on the new balance on the account. There is usually a fee associated with doing it, but it is significantly less than a refinance. I've been told it's about $300 with our servicer. A recast does not change the interest rate or reset the 30 or 15 year clock, which would be the case with a refinance. There is a great calculator here to shows it in action.

Our P&I payment will go from about $1540 down to $438 after recasting. We were planning on making large extra payments to rid ourselves of this loan some time next year. Having a much lower P&I payment gives a lot more margin in the case of an emergency, such as having a job loss or major illness.

UPDATE: A post about completing a recast is here.

Total Opportunity Cost

We essentially moved up in house by $100,000 ($291,000 after closing costs, to $389,000). Because we had to buy the new house before selling the old, there was a measurable financial cost involved.

Thankfully we were able to sell our old house rather quickly, within 30 days of closing on our new house. To be conservative, we will be making two mortgage payments on our new house before we apply a huge chunk of our equity into the new loan and recast. That means at the very least, there was extra interest and PMI involved. Assuming the interest rates were the same:

• Two months of PMI :$900
• Two months of higher interest : $(1020 + 1019) - (291+291) = $1,457
• Total opportunity cost: $2,357

This does not take into account paying insurance on the old property ($300/mo), or paying to keep the utilities on (about $250/mo). If we had not secured a buyer as quickly as we did, we would have wasted over $1,700 per month on extra interest and PMI on the new house, plus interest and utilities on our paid for TN house.

Closing Thoughts

My wife and I have enjoyed having no debts, including a mortgage, hanging over us for the past four years. We want to get back to that. We don't intend to keep this new mortgage for 30 years. Having no mortgage has enabled us to have more opportunities to do fun things but also to give more generously. And, it was one less stressful thing to have to budget for every month. Until now, not having a score had not caused us any issues, save the one time I tried to rent a car from Avis (but had no problem renting a compact car from Thrifty next door). We were able to go to Disney and book a cruise in the past 4 years, and we both flown on Southwest several times without any other issues.

With that said, this whole process would have been so much simpler if we had maintained a credit score, even if we just had a small credit card or two paying our monthly bills on. I really hate that as a society this is where we are at. The fact that we paid our house off early and built up $300,000 in equity, made it harder to get a new mortgage than if we had still been paying on our original mortgage, or if we had used a couple credit cards over the past few years.