Editorial Policy

Slim credit file requires thinking creatively

Erica Sandberg

March 21, 2014

QHi Erica,

My wife and I financed our house through the previous owner because it was a great rate at the time and allowed us to buy more house than a bank might have approved. Now, we are moving out of the area, want to buy again and are concerned that our credit might not be good enough for the rate we want because the private loan wasn't reported to the credit bureaus. What do we do? –Peter

ADear Peter,

You bought a home you wanted and secured excellent financing from the original owner when you might not have qualified otherwise? That's fantastic! Rather than give up or delay the process, you got creative and made the alternative arrangement work in your favor.

Of course, the downside to the deal is that your credit report doesn't show all the fine borrowing history you've developed. Nor is your credit score factoring that data in, since it's an invisible account. Most lenders depend on FICO scores to help them determine risk. These scores only use the information listed on a credit report to generate a score.

However, this doesn't mean you're out of the running for a new loan from a legitimate bank. Just tap into that creative spirit again.Ask Erica

I asked Bruce Specter, the senior loan consultant at Summit Funding in Reno, Nev., if there's a way to make your past payments known. Thankfully, you have a couple of decent options.

You likely used an escrow account to process the payments, says Specter. He suggests you present evidence of the escrow account to the new lender in lieu of a record listed on a credit report.

Did you really go off the grid and simply send money directly to the people who sold you the house? According to Specter, even canceled checks might suffice. Collect your statements from the beginning of the loan. Because they should be in the same increments, and cashed approximately on the same date of each month, it will indicate consistency and reliability — two qualities banks like to see in a borrower.

Also, you may have other accounts that appear on your credit report. Maybe you have a credit card or two or a student, personal or car loan. If you have any of these products and have been treating them responsibly, you'll have a file full of goodness and a score that's attractive to lenders.

But what happens if you have a blank credit file? You may have to put your next home purchase on hold until you can add positive information to it. Get a credit card, and use it regularly and responsibly for at least a year. That way a lender will be able to project risk. With nothing to assess, they'll be in the dark, and you might be out of a home loan.

Of course, the way you've been handling loans and credit lines are only part of the qualification equation, so analyze what else you can bring to the table. That includes a substantial down payment, a steady job that pays enough for you to meet the mortgage payment, proof that you can afford the loan, and enough capital in savings and assets to act as a safety net in case you become unemployed. So, you have some options. Choose the solution that best fits your situation, and best of luck!

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