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What does it take to buy a home without credit?

Posted: 2:01 PM, Feb 16, 2016
Updated: 2016-02-16 20:01:45Z

Having bad or no credit can be a huge obstacle in many situations, perhaps none more difficult than when you’re trying to buy a home. In fact, homeownership can be one of the biggest reasons people set out to build good credit to begin with. But, while establishing a strong credit history is the most common route to homeownership, it’s not the only way there.

Like anything else, you can buy a home with cash. In 2015, all-cash transactions made up 30.1% of single-family home and condo purchases (down from a peak of 36.3% in 2012), according to real estate data company RealtyTrac. Someone may want to buy a home using cash for many reasons, but if you have bad or no credit, it’s probably your only option.

The Pros & Cons of Paying Cash

“Some people have terrible credit and they’re afraid they won’t qualify for a mortgage,” said Diane Saatchi, a senior broker with Saunders & Associates, a real estate company in the Hamptons. Then there are the cash buyers who don’t want to deal with the credit world. “They don’t want to be subjected to the scrutiny of a bank. … They like to live under the radar.”

Even if you live in a very inexpensive part of the country, buying a home with cash requires saving a lot of money — or making a lot of money. The median home sale price in the U.S. is $183,500, according to real estate data company Zillow, but a home priced well below that would still require a person to have significant resources to buy it without a loan.

“If you’re paying $100,000 cash, you’ve either saved for a very long time or you’re coming from some money,” said Doris Phillips, chief operating officer of Lake Homes Realty and a real estate broker in Alabama and Georgia. Oftentimes, people who buy homes in cash are purchasing luxury or secondary homes, she said.

Beyond the fact that buying a home in cash doesn’t require you to have good (or any) credit, it can save time and money.

“A lot of times [in] cash deals there’s only one Realtor involved, so you can really negotiate down the commission,” Phillips said. Closing costs tend to be much lower, as well. “You don’t have to have mortgage insurance, you’re not paying mortgage tax, you’re not paying lenders’ costs and underwriters’ costs, you’re not paying points to the lender.” 

She said a cash purchase could take about five days from start to finish, rather than the several weeks that a mortgage requires. As far as logistics go, you sign a handful of documents and wire the money from your bank account to the title company.

Cash-Only Offers Trump All?

Cash purchases certainly have disadvantages, though. You can get a tax deduction for paying mortgage interest, and interest rates are very low right now, so borrowing is relatively cheap and allows you to do something else with all that cash. And cash offers aren’t always going to win a bidding war. It really depends on the seller.

“We go up against cash buyers all the time and a common theme with those people is that [they think] they’re better than everybody,” said Scott Sheldon, a senior loan officer with Sonoma County Mortgages in California. “They tend to be very low-ball oriented offers that we tend to beat out regularly.”

On the other hand, it’s low-risk for the seller.

“A cash deal is pretty much a sure deal,” Phillips said. “Mortgages can fall through the crack with one simple thing.”

If you’re not in a position to buy property with cash but still want to be a homeowner, you can focus on building a good credit score while saving for the purchase. Smart credit use, like making payments on time and spending very little of the available credit on your credit cards, will help you improve your credit scores over time. You can learn more about fixing your credit here and track your progress by getting two of your credit scores for f ree every month on Credit.com . And check your free credit report every year at AnnualCreditReport.com.

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