Blog, Documentation, FHA

FHA Loans – Qualifying Using Non-traditional Credit

There are numerous reasons why an FHA loan might be the best choice for your loan.  One of the greatest reasons is that non-traditional credit can be used to help you qualify.  Non-traditional credit also called “Alt-tradelines” do not show up on a traditional credit report, but FHA allows those types of accounts to be a source of credit and lets lenders use them to evaluate credit worthiness.

Effective 5-29-2008 FHA and the department of Housing and Urban Development (HUD) released a new set of guidelines for alternative tradelines.  They divided these types of accounts into 2 groups to help lenders and underwriters evaluate borrower credit worthiness:

Group One – rent/housing payments, gas, electricity, cable and land-line phones.  These tradelines need to be paid separate, and not be included in the rent payment.  Also if the borrower is renting from a family member, HUD requires lenders to request independent documents to prove regularity of payments, such as cancelled checks.

Group Two – consists of receipts of paid auto insurance, renter’s insurance, cell phone, internet, school tuition, child care providers, etc.  These types of accounts are acceptable but do not hold as much weight as Group One accounts.

Verifying Nontraditional Credit – HUD prefers all non-traditional credit references be verified by a credit bureau reported back to the lender as a nontraditional mortgage credit report (NTMCR) in the same manner as traditional credit references.  If a method is used to verify credit and rental references other than NTMCR, all references obtained should be backed with the most recent 12 months cancelled checks.

Evaluating Nontraditional Credit -

1. No history of delinquency on rental housing payments allowed.
2. No more than one 30-day delinquency on payments due to other creditors.
3. No collection accounts/court records reporting (other than medical) filed within the past 12 months.