It is almost a given in today’s world that you need to take on debt to get by. Most people get a credit card to develop a credit history and you need a good credit score to buy a car, rent an apartment, or to even get a job. 

Unfortunately for many, that leads to problems. Because they don’t know the proper way to use credit cards, they end up deeply in debt. Instead of getting by, they’re going under.

Yet it doesn’t have to be that way. In fact, it historically never was. You didn’t even need a credit score, good or otherwise, to buy a house. And you still don’t today. That was the surprising revelation financial advice guru Dave Ramsey shared in an interview. Not only don’t you need to have a credit history, you can still buy a house with a 0 credit score.

24/7 Wall St. Insights:

• Most people believe that to make it through life these days, having a credit profile is essential.
• Financial advice guru Dave Ramsey says that’s false because the only reason you need one is if you’re going to borrow money.
• Yet you can still buy a house with a 0 credit score through the established method of manual underwriting.

Mortgaging the past

While a mortgage has roots that extend back to ancient times, as far back as the fifth century B.C., the modern mortgage is an artifact of the Great Depression. Before then, few people actually owned their own homes, only 40%, according to American Financing. There was nothing resembling a bank loan to finance the purchase.

That changed in the 1930s. Rather than banks, though, insurance companies desiring to acquire property cheap took advantage of the difficult times. Buyers were only able to finance half the cost of the home and had to repay the loan within three to five years with a balloon payment at the end. If borrowers fell behind on their payments, the insurance companies would seize the property. According to Fannie Mae, nearly a quarter of all homeowners lost their homes to foreclosure during the Depression.

It was Fannie Mae’s creation in 1938 that paved the way for the fixed-rate, long-term 15-year mortgage. It wasn’t until the 1950s when the Federal Housing Administration (FHA) was founded that the 30-year mortgage was introduced and Congress authorized their use for both new and existing homes.

Know your customer

Up until then, it was typically local savings and loan institutions that did the underwriting on a mortgage. Think George Bailey’s S&L in the movie It’s a Wonderful Life. Yet Duke University says there were no standard procedures for evaluating a loan. Because they were local in nature, the banks relied upon their knowledge of the borrower to determine whether he could repay.

A more systematic, step-by-step approach became more common in the 1970s. Ramsey notes that when he got into real estate in 1978, that was how underwriting was performed. They wanted to know if you had a job, what your income was, and whether you had enough money in your bank account for the down payment. Through a process known as manual underwriting, the lender would determine if you were financially able to buy the house. 

Key takeaway

We seem to have gotten away from that these days, as automation and reliance upon credit scores rule the mortgage process. Artificial intelligence is even playing an increasingly larger role, too, with companies like Upstart Holdings (NASDAQ:UPST) using AI for risk assessment to determine credit worthiness.

Yet, as Ramsey points out, manual underwriting is still used today, though it is reserved more for special circumstances than the typical mortgage approval process.

So it is still possible to buy a home without having a credit history, which itself is a worthy goal. Without credit cards, you don’t open yourself up to the pitfalls taking on debt creates. And as Ramsey says, there is only one reason to build credit and that is to borrow money. So if you don’t plan to borrow, you don’t need credit. Even when you’re buying a house.

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