One of the downsides of being deb- free is that it makes you invisible to the banks, making it more difficult to take out a loan, and particularly a mortgage, in the future.
While it is more challenging, it isn’t impossible if you learn more about how mortgages are approved, and how you can still obtain a loan by working with real humans instead of just automated systems.
Having No Debt Means You Are Invisible To The Banks
In 2020, when I was ready to buy my third home, I was surprised to find that I was getting rejected to take out a loan for a mortgage. Oddly, because I had paid off all $300,000 of my debts, including $72,000 of student loans and two mortgages, I wasn’t qualified as a good borrower.
According to traditional banks, I wasn’t a good candidate for a loan even though I had close to $1 million in net worth, including currently owning a paid off home, because I became one of the 10% of Americans who are “credit invisible.”
As of 2010, 26 million American consumers in the United States, representing about 11% of adults were credit invisible, according to the Consumer Financial Protection Bureau’s Office of Research.
An additional 19 million consumers, or 8.3% of the adult population, had credit records that were “unscorable” by a commercially available credit scoring model. These records were about evenly split between those with insufficient credit history (9.9 million) and those with a lack of recent history (9.6 million).
I fell into the latter bucket with no recent credit history. That meant that even though I had more than 15 years of credit history, showing more than 20 accounts I had managed over my adult lifetime, because I had no current open debt accounts, my score was not bad. It was just blank.
When banks looked up my name, I didn’t have a FICO score attached, which was problematic since 90% of the most well-known financial institutions make their lending decisions based on this one measure.
What Does Your Credit Score Measure If It’s Not Your Money Management Skills?
Homebuyers often mistake credit scores are an indicator of financial health, and that isn’t always the case because this number does not take into account other important factors.
Credit scores do not take into account important factors like your income, job history, cash savings, property and investments. Instead, your credit score measures your current relationship.
While your payment history and your length of time making payments composes half of your credit score, the other half measures your relationship with current debts including how much you owe currently, the mix of debts you have and how often you ask to open new lines of credit.
I had thought that obviously since I had a history of paying off all my student loans and mortgages that I would be a no-brainer candidate for a loan. But it turned out the opposite was true.
Most Large Banks Aren’t Training Humans To Approve Mortgages In Detail
That’s when I learned the representatives who approve mortgages at many large institutions don’t really know how to evaluate a mortgage application. Many use automated programs that analyze your loan application — rather than a real human to decide (often within minutes) whether or not you should get approved for a mortgage.
Because I hadn’t carried any debt, and I hadn’t used credit cards in more than three years, the fact that I had no current debts made it seem like I had never had any credit lines open. One customer service representative tried to explain to me that the reason the bank couldn’t offer me a loan was because I didn’t have enough experience.
All he was looking at was the first page of my credit report that showed dashes where numbers should be in my credit score. He assumed I had never taken out any credit and that’s why my score was blank.
I asked him to actually review my credit history where he saw the years of paid off accounts, and he said he had never seen this before. I asked him why I wasn’t qualified since I could prove I paid off two mortgages in the past in full. He couldn’t answer, and that’s when I learned a better approach.
Ask For Manual Underwriting And For An Expert To Review Your Application
Manual underwriters perform a detailed review of your financial information to make sure you’re qualified for a mortgage. Even if you’re not credit invisible, you may benefit from manual underwriting if you:
- Are self-employed or have non-traditional income;
- Have a FICO credit score between 300 and 579;
- Need a loan bigger than the loan limit, called jumbo loans; or
- Are applying for a specialized loan from agencies such as the Federal Housing Administration or Veterans Affairs Administration.
That means you’ll have to spend a little more time gathering up your personal data and getting it organized for a real person to review. It also means that you may have to answer some more specific questions. Some factors they’ll look at include:
- Cash reserves
- Other assets such as property or investments
- Income and employment history
- Debt-to-income ratio
- Other financial responsibilities including student loans, personal loans, child support and any other recurring payments
Finding a manual underwriter will take more time, as I went to three traditional banks that would not offer one. I had not initially looked for a manual underwriter because I falsely assumed most banks would offer it.
I ultimately did find a lender who not only made the process simple and almost enjoyable (my underwriter was very kind). The experience made me even more confident that I was making a good financial decision because the underwriter was very thorough in their line of questioning.
I also got a very competitive rate to what the other banks were offering, dispelling the myth that I’d have to pay more than going through an automated system. Even if you have great credit, I strongly recommend working with a bank that will add a human touch.
By getting to know you as a person and not just a number, the right mortgage lender can help you make sure you are making the best financial decision for you, and not just maximizing their profit.