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Too Thin to Buy?

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Posted On: 02/15/2017

Question: My lender says we have a “thin” credit file and because of that cannot be considered for many mortgage programs. Apparently we are being penalized for avoiding debt and paying cash. What is “thin credit” and how do we make it, um, fatter?

Answer: Lenders are in the business of making mortgages, but they have a dire fear of risk so before they write a check, they want to be certain borrowers are financially qualified. This is done in large measure by looking at a number of standard factors such as income, debts, assets, and credit.

For most of us, credit is proven with credit reports and credit scores. However, a large number of individuals are outside the credit scoring system. According to the Consumer Financial Protection Bureau, about 45 million people are credit invisible or credit un-scorable.

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By “credit invisible” the government means people who don't have a credit report and are off the credit grid. “Credit un-scorables” are individuals who have credit reports, but the data is so old or sparse that it can't be scored. Because un-scorables present so little data their credit reports are said to be “thin.”

There are several ways around the problem of thin credit reports.

First, get a few credit cards – say from a gasoline company or a department store. Pay the balance in-full and on-time each month.

Second, ask lenders about non-traditional credit options.

The fact that someone lacks a full credit report does not necessarily mean they're a poor credit risk. Maybe they prefer to pay bills with cash. Maybe they don't trust banks. Maybe they believe avoiding debt is the route to sound finances. Or, imagine someone with a good job who lives with their parents – there may not be any visible rent or utility payments.

Borrowers may be able to document credit by using 12 consecutive months of canceled checks to show regular payments for such things as rent, insurance, childcare, utilities, cell phones, and cable TV.

To meet the underserved market represented by those without credit standing the lending industry is increasingly open to non-traditional credit. For example, last summer Fannie Mae said when two people jointly purchase a property the “borrower with a credit score will no longer be required to contribute more than 50 percent of the qualifying income,” meaning that a borrower without a credit score now can be the bigger wage earner.

Nontraditional lending standards are evolving and becoming more broad-minded; so don't panic if you have a thin credit file. For additional information speak with local lenders.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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