A Common FHA Mortgage Question: Can Non-Traditional Credit Be Used?

In some cases, yes!

There are several benefits of an FHA mortgage.

One of them would be the easier credit guidelines that are utilized for mortgage approval.  Credit reports that have credit history and credit scores are referred to as traditional credit.  Is the most often used when lenders underwrite FHA mortgages. Occasionally, credit reports will not have this necessary information since some borrowers choose not to use traditional credit, such as bank credit cards. This type of qualifying requires using non-traditional credit for FHA mortgage approval.

FHA underwriters are required to determine a borrower’s short term and long term bill paying habits. When traditional credit is not available, at least three credit references must be used to produce a credit history. Acceptable non-traditional references are rental housing payments and utility company payments which can be from gas, electricity, water, cable television and land-line telephone service. These accounts must be in your name and you must have a good payment history verified via a 3rd party with the non-traditional reference.  At least one of these credit references, which is considered Group I, must be verified. Other acceptable references, which is Group II, are insurance premiums, payments to child care providers, payments for school tuition, retail store credit cards, payments at rent-to-own centers, payment for medical bills not covered under any insurance, internet and cell phone bills, automobile leases and any personal loan from an individual that has repayment terms in writing and cancelled checks. FHA prefers that verification of non-traditional credit be performed by a credit reporting agency who will collect the information and format it similar to traditional credit references. In some instances, it is necessary to go a step further and have the borrower produce 12 months of cancelled checks for the transactions, such as instances when renting from family.

When a borrower only has Group II references (considered insufficient credit references), it is necessary to have a satisfactory credit history that includes 12 months, no more than one 30 days late on any payment and no collection accounts or court records filed in the past 12 months. Payment to income ratio may not exceed 31% and total debt to income ratio may not be higher than 43%. With insufficient credit references, compensating factors are not allowed. Borrowers should also have two months of cash reserves which come from their own money sources since gifts cannot be used for cash reserves with insufficient credit.

Using non-traditional credit for FHA mortgage approval may sound like it is a difficult task for both the borrower and lender, but actually it is not. Provided the borrower can provide names and contact numbers so the credit reporting agency can complete the verification, the procedure will move along quickly. FHA non-traditional credit qualifying is never meant to be a burden, but it is designed to protect all parties involved in the mortgage transaction.  Not all investors allow for non-traditional credit, be sure to ask your mortgage lender if non-traditional credit is allowable.  FHA has low mortgage rates which make it a great time to purchase a home. Current FHA 30 year fixed mortgage rates are at 4.25%, FHA 15 year fixed mortgage rates are at 3.750% and FHA 5/1 adjustable mortgage rates are at 3.250%. Without FHA’s special guidelines for non-traditional credit, many borrowers would never be able to own a home.

DISCLAIMER: Neither Indiana 203K Mortgages (Indiana203kMortgages.com) nor Luminate Home Loans is affiliated with any government agencies, including the FHA.