The U.S. Department of Housing and Urban Development has spelled out guidelines for qualifying borrowers using nontraditional credit.
Applicants for loans insured by the Federal Housing Administration who have has insufficient trade lines with Equifax, Experian or TransUnion and lack a credit score can alternatively be qualified using nontraditional means, HUD said in a mortgagee letter this week. Lenders can also use nontraditional credit to qualify applicants whose credit score was based on just a few trade lines.
But nontraditional credit reports cannot be used to enhance a poor credit history on a traditional credit report.
Lenders can consider the last 12 months' payment history from three creditors including documented landlords, gas utilities, electric utilities, water, land-line home telephone service and cable TV, HUD said.
In the event that payment histories can be verified for only one of these types of creditors, then 12-month payment histories can be verified for two other creditors including insurance coverage that is not payroll deducted, businesses that provide child care and school tuition, according to the mortgagee letter. Other acceptable alternatives include retail stores, rent-to-own, uninsured medical payments, Internet services, wireless phone services and automobile leases.
In addition, HUD noted lenders can consider 12 months of savings deposits when they are not payroll deducted and result in an increasing balance as well as personal loans from individuals when a written note was executed and canceled checks can be provided.
"We prefer all nontraditional credit references be verified by a credit bureau and reported back to the lender as a nontraditional mortgage credit report in the same manner as traditional credit references," the letter stated. "Only if a [nontraditional mortgage credit report] is impractical or such a service is unavailable may a lender choose to obtain independent verification of trade references."
If a lender does perform the verification, contact information must be obtained from public sources, and not the borrower, according to the agency. In addition, verification of rent may be obtained from management companies in lieu of 12 canceled checks.
HUD said the nontraditional credit report should be formatted the same way as traditional reports and should include the creditor's name, date opened, high credit, current account status, required payment, unpaid balance and a payment history that reflects the delinquency categories of 0x30, 0x60, etc. Subjective statements like "satisfactory" or "acceptable" should be excluded.
"FHA has no objection to the use of various service providers now operating that are able to develop a bill-payment history, as well as a score by obtaining rental payment history, utility trade-lines, and other common recurring non-reporting bill payments," HUD added. "While we do not endorse any particular service provider, FHA approved lenders may use such services to develop a credit history for borrowers with no or little traditional credit."
Borrowers who require nontraditional reports cannot have any delinquency on housing payments, cannot exceed 1x30 on payments to other creditors and cannot have any collection accounts or court records reported within the prior 12 months -- though exceptions can be made for medical.
Only income from occupants of the subject property who are also obligated on the loan may be considered. The maximum payment-to-income ratio is 31 percent, and the maximum total debt-to-income ratio is 43 percent.
Compensating factors don't apply to borrowers with insufficient credit references, and two months' cash reserves -- excluding gifts -- should remain after closing.
While the guidance is effective immediately, it must be considered for borrowers without traditional credit beginning with case numbers assigned on May 29 or later.