Let me start by saying that I’m a huge Dave Ramsey fan. Dave Ramsey, founder of Ramsey Solutions and a get-out-of-debt guru, is all about staying debt-free and living a cash-only lifestyle. I agree, debt-free is the way to go. In a perfect world none of us would have debt. But I live in a house buying world where debt, called a mortgage, is the only way the vast majority of buyers can purchase a home.
I recently had an experience with a client that made me want to sound warning bells. John and Sarah (not their real names) sold their home in 2019. They moved into an apartment while looking for their next home. They had the proceeds from the sale of their home in the bank and one credit card in John’s name which carried a very low balance. They paid this credit card off every month. While I don’t know if John and Sarah were Dave Ramsey fans, they could certainly be Dave Ramsey stars. They could have called into his radio show (as many do) and yelled “WE ARE DEBT FREE!” but could they still buy a house?
A couple of weeks ago they found “the” home and called their loan provider to update their preapproval status so that we could make an offer on the home. They were shocked to find out that in the absence of any debt in her name, Sarah no longer existed in the credit reporting system. The home they sold in 2019 was the only debt she had. Sarah had no credit cards, no car loans, nothing in her name. She worked and her income was necessary to purchase a home, but the lapse in having ANY credit had a devastating effect on their ability to buy Sarah didn’t have a LOW score, she had NO score. To the Consumer Finance Protection Bureau – the gods in the credit sky that disperse credit worthiness – Sarah was “credit invisible,” thus a higher risk to a mortgage provider.
According to Dave Ramsey, this is a good thing. I pulled from his website: “Turns out that one of the wisest things you can do for yourself, and your family is lose your credit score. It means there’s absolutely zero chance you’re currently in debt or at risk of slipping into debt anytime in the near future.” Ramsey does admit that you will be “less likely” to be able to purchase a home with no credit score unless you go to one of his endorsed mortgage providers. He provides a link to one his loan buddies through which if I get my loan, I may get a house and Dave Ramsey gets paid. Hear me on this: re-read my first line. I am a big Dave Ramsey fan. Nothing illegal here, nothing even unethical. He is a terrific entrepreneur who has found a way to make A LOT of money advising you how to keep yours. But the truth is, having no credit score can make it much more difficult, and costly, to borrow money.
To borrow money, you must get the approval of a human underwriter or electronic underwriting system. Underwriting is the verification of your ability to borrow, approval of the loan, and authorization for dispersal of funds. Most banks/mortgage companies use electronic or “desktop” underwriting (DU). No human sees the verification data until hours before closing. DU will kick you out immediately because you do not have their primary determinant: a credit score. With no credit score you must go to a mortgage company who still does their underwriting manually. This means all parts of the approval process are still done by a person (think 1983) and your lack of credit can be explained. The human underwriter will seek out other forms of payment history such as utility or phone bills, verification of rent or car payments. This added effort has an added cost. Expect to pay a slightly higher interest rate for what the bank believes to be higher risk.
The solution? Sorry, Dave, but my advice is to keep at least one credit source in your name and responsibly use it. Like John and Sarah: one credit card, paid off every month. Debt may be a destructive force when mismanaged, but proof of a past of well-managed debt is still the only way most loan providers trust you with money at premium rates to pay back in the future.
This Blog is written by Kathy Chiero, Lead Agent for The Kathy Chiero Group. Thinking of Buying? Get a copy of my free book “Ten Ways to Win in a Challenging Market” Visit us a OurOhioHome.com Ready to sell? Contact us for a no-obligation analysis of the value of your home.