Recently there was a comment on one of my blogs about Non Traditional Credit. For those who are not familiar with the term, Non Traditional Credit it is a process of creating credit history for Borrowers who have insufficient credit scores, or no credit scores at all.
There are basically three reasons why a Borrower has insufficient credit scores, or no credit scores at all:
- The Borrower has never bought anything on credit before.
- The Borrower had all their credit accounts closed, usually because of a bankruptcy, and has not reestablished credit again.
- The Borrower had credit but stopped using it, because they purchases everything with cash. As a result they lose the credit scores that they once had. If the Credit Bureaus no longer have active credit accounts to evaluate a Borrowers payment history, then they will not be able to provide the Borrower with credit scores.
If a Borrower does not have credit scores, then they cannot qualify for a Mortgage, therefore, credit scores have to be generated/created through a method that is referred to as Non Traditional Credit. Both Conventional Mortgage Programs and FHA have a process that the Borrower will need to follow. For the purpose of this blog I am not going to go into the Non Traditional Credit process for Conventional and FHA Mortgages because they are both very similar. So the process below basically applies to both.
In order for a Borrower to establish Non Traditional Credit, they will have to demonstrate a satisfactory credit history for a minimum of 12 months. During those 12 month they cannot have:
- Any rent delinquencies.
- No more than one 30 day delinquency on credit accounts
- No Collections (other than medical) or Judgments filled within the last 12 months.
In applying for Non Traditional Credit the Borrower must provide at least four credit reference, and a minimum of one reference must come from one of the follow:
- 12 months Rental Housing history (will be verified with landlord)
- Utility Bills:
- Land-Line Phone Service
- Cable TV
NOTE: Lender will obtain verification from the Utility Company that payments have been made on time for the prior 12 months.
The remainder of the four credit references that the Borrower will need to provide can come from:
- Insurance Company (not payroll deducted)
- Child Care
- School Tuition
- Cell Phone
- Car Lease
- Personal Loan with formal payment terms.
- 12 month history of saving deposits which result in an continuous increase in the balance (cannot be payroll deducted)
Mortgages that the Borrower uses Non Traditional Credit to qualify, are manually Underwritten, and the following will apply:
- 31/43 Debt-To-Income Ratios
- Two months Reserves
- Compensating Factors cannot be considered
A Borrower who does not have sufficient credit or no credit scores, may be able to qualify for a Mortgage with a Co-Borrower who has established credit scores. Both Conventional Mortgage Programs and FHA have a provision that allows for a Co-Borrower to be used.
NOTE: Even though both Conventional Mortgage, and FHA have a provision that allows Non Traditional Credit, and the inclusion of Co-Borrowers. The tightening of guidelines in recent years, has resulted in many Lenders and Investors not accepting Non Traditional Credit, with or without a Co-Borrower even though the guidelines allow it. So if a Borrower needs to use Non Traditional Credit to qualify for a Mortgage they should contact local Lenders as soon as possible to see if they will consider the use of Non Traditional Credit.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org