There was always one issue that would trip me up on the Dave Ramsey system.  There was one piece that wouldn’t quite fit, that didn’t have a perfectly clean answer that really worked when you tried to live it out.

I know his system well.  I can answer questions about the system in the spirit of how he would – albeit not as concise or witty as Dave himself would do it.  I’ve studied and lived on those principles and the Baby Steps for seven years now, and we’ve even become completely debt free.

But one question always nagged at me.  I never had a really clean, clear, exact answer.  That question, in so many words, was as follows…

I love the Dave Ramsey plan, but if I follow the plan and don’t have any debt, and therefore no credit score, how do I qualify for a mortgage and buy a home?

Great question, my friend.  Until this point, I’ve not had a great answer for you, other than to buy it with cash.  Dave talks about mortgages that qualify using traditional underwriting, and don’t depend on your credit score.  The main company for this is Churchill Mortgage, a great company, but their page on no credit score loans isn’t particularly reassuring (nor are their agents particularly optimistic, in my limited experience).

Now, I have an answer.  It partially lies in the changes in the credit industry that are underway, including a new player in the market.

An aspect of the credit industry that puts debt-avoiders at a disadvantage is the heavy reliance on the FICO® score – the predominant model for scoring someone’s credit-worthiness.  FICO scores only track your interaction with debt.  According to myFICO.com, It uses an algorithm to determine your score based off five categories: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), and Types of Credit Used (10%).

You can see from what it scores that the FICO score doesn’t rate your financial health, but only your ability to borrow money and pay it back on time.  If you don’t borrow money, you’re not going to have a very good credit score.

What we’ve lacked in the industry for some time is a way to rate someone’s credit-worthiness by other means, or alternative credit.  Alternative credit is your payment history with non-debt services, like rent, utilities, insurance policies, etc.  While lenders have been required by law to consider alternative credit for some time, they are not required to put major emphasis, nor have they had a reason to do so.  There has not been a system to rate someone’s alternative credit.

ecredable

Enter eCredable®.  eCredable is a credit reporting agency with a system designed to help people with a lacking credit history get access to financial products at affordable rates.  Using your payment history for recurring bills like rent, utilities, insurance, and other services that you indicate, they generate an AMP (“All My Payments®“) Credit Rating® on a scale of A thru F, with F being the worst.

AMP Credit Rating

eCredable has negotiated standing agreements with lenders who have agreed to use the AMP credit rating.  One of those standing agreements is with Churchill Mortgage, who is licensed to do business in 23 of our 50 states.

So, if you’re serious about avoiding debt, and you buy into this system, here’s the answer on how to buy home with no credit:

1) Sign up for eCredable; it’s free and there’s no credit card required.  Setting up your account is easy – simply add all the bills you are currently paying.  If you have been paying your bills on-time for more than 24 months, you may be qualified based on your credit rating alone to apply for home loan today. However, if you are just starting out, pay all your bills early or on time for 18-24 months to demonstrate good payment behavior and build your AMP Credit Rating.  Make sure you’re tracking at least 4 accounts, including one major account like rent.

traditional v. alternative

2) If you have any debt, pay it off as fast as possible and build a down payment of at least 20%.  Your debt needs to be paid off for at least six months before you apply for a loan under this system, because we need your FICO score to completely disappear.  I would recommend being debt free for a year.  You’ll need that much time, anyway, to build your down payment after becoming debt free.

3) When it comes time to apply for a mortgage, verify your credit accounts with eCredable.  This is the only step the costs money, because when you order the verification, eCredable agents review and verify all the bills that you select to include in your AMP Credit Report® with the account holder.  They go and confirm your payment history with your landlord, insurance company, utility company, etc., then create an AMP Credit Report and AMP Credit Rating, which you submit to your lender when you apply.

credit report

4) Apply for your loan within 30 days of receiving your AMP Credit Report.  Churchill Mortgage has agreed to consider applicants who have an AMP Credit Rating of A or B, a 20% down payment, and at least four alternative credit accounts, with one being a rental or lease payment.  Applicants must have no FICO score, bankruptcy, or collection notice in their credit file.

While this process seems a little lengthy, it’s going to be well worth it if you’ve made the commitment to stay out of debt.  It won’t set you back on your overall financial goals, either!  It will cost you a lot more in time and interest to build a credit history that will be acceptable to the big banks.

What do you think of this plan to buy a home with no credit score?  Could it work for you?