Non-Traditional Credit In Mortgage Qualification Process

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Non-Traditional Credit In Mortgage Qualification Process

This BLOG On Non-Traditional Credit In Mortgage Qualification Process Was UPDATED On October 9th, 2018

There are cases where mortgage borrowers do not have any credit scores.

  • This is due to them not having any credit tradelines that report on the three credit bureaus
  • Many lenders will require three credit tradelines that have been seasoned for at least 12 months in order for them to approve a borrower
  • However, minimum seasoned credit tradeline requirement is a lender overlay
  • Not HUD Guidelines to qualify for FHA Loans
  • HUD allows for borrowers with no active credit tradelines to qualify for FHA Loans
  • However, the only way for mortgage underwriters to predict credit risk is by reviewing prior credit history of borrowers
  • Non-Traditional Credit For Borrowers with no credit tradelines is permitted

Mortgage And Rental History

Mortgage/Rental History

  • There are many instances where the Automated Underwriting System will require verification of rent and/or verification of mortgage for borrowers with credit scores under 620
  • Borrowers who are living rent free with family may be excluded and exempt as long as the rent free status can be documented

Traditional Versus Non-Traditional Credit In Mortgage Qualification Process

Traditional Credit are credit tradelines that report on credit bureaus.

Here are examples of traditional credit tradelines:

  • Auto Loans
  • Student Loans
  • Credit Cards
  • Revolving Accounts
  • Installment Accounts
  • Mortgages

To be considered a credit tradeline, one year seasoning is required.

Typical Non-Tradtional Credit 

Examples of non-traditional credit tradelines are creditors who do not report on the credit bureaus.

Here are some examples:

  • Cell Phone
  • Utility Bills
  • Insurance bills
  • Cable TV
  • Rental Verification
  • Internet monthly payments
  • Any other creditors that do not report on credit bureaus

Non-Traditional Credit In Mortgage Qualification Process For Borrowers With No Credit

Non-Traditional Credit In Mortgage Qualification Process needs to be documented using a Non-Traditional Credit Report also referred to as NTMCR.

  • All direct verification on non-traditional credit in mortgage qualification needs to be obtained when a NTMCR is impractical or the service is not available
  • Non-Traditional Credit may be used when borrowers doesn’t have the specific type of credit tradelines that appears on a regular traditional credit report
  • Or to supplement an insufficient amount of credit tradelines

Cases Where Non-Traditional Credit In Mortgage Qualification Process Cannot Be Used

There are instances where non-traditional credit in mortgage qualification process cannot be used.

Here are the instances where it cannot be used:

  • To Offset derogatory credit tradelines
  • To create a new credit report for mortgage borrowers without verifiable credit payment history
  • Enhancement of poor payment history of borrower
  • Non-Traditional Credit Tradelines must have three credit references
  • Verification Of Rent is the best form of non-traditional credit that a borrower can provide
  • Insurance payments such as medical, life, automobile, and renters insurance coverage that is not payroll deducted can be used as non-traditional credit tradelines

Forms Of Non-Traditional Credit That Can Be Used

Payment to care providers for children and elderly can be used as non-traditional credit tradelines.

It needs to be made to a business that provides such services such as the following:

  • Student Tuition
  • Retail Stores such as department stores, furniture stores, appliance stores, and specialty stores
  • Rent to own stores such as furniture and appliance stores
  • Payment of medical creditors that is not covered by insurance is considered non-traditional credit.

How Are Non-Traditional Credit In Mortgage Qualification Process Work

The way non-traditional credit in mortgage qualification process works is the following:

  • Documenting 12 months history of saving by regular, non-payroll deducted deposits which results in increasing balance to the account
  • Non Sufficient Funds are deal killers

Other examples of non-traditional credit

  • Auto Leases
  • Personal loans from non-company individuals can work if there is a written payment agreement with repayment terms and supported by canceled checks to verify payments

Non-Traditional Credit References needs to include 12 months payment history with the following terms:

  • No history of late payment on rental payments
  • No more than one thirty day late payments on any other tradelines
  • No collections other than medical collections in the past 12 months

Insufficient Non Traditional Credit In Mortgage Qualification Process

Credit requirements for borrowers with insufficient credit is tougher than those with standard three credit traditional credit tradelines.

Here are the credit requirements for borrowers with non-traditional credit tradelines:

  • Credit history of timely monthly payments during prior 12 months.
  • No more than one 30 day late payments
  • No collection accounts filed in the past 12 months other than medical collections
  • Front end debt to income ratios not to exceed 31% DTI and back end DTI not to exceed 43% DTI
  • DTI can be extended to 50% with compensating factors
  • Two months reserves from borrowers own funds required
  • Reserves cannot be gifted

Home Buyers who do not meet credit tradeline requirements from other lenders can contact The Gustan Cho Team at Loan Cabin at 262-716-8151 or text for faster response. We are direct lenders with no lender overlays on government and conventional loans. We are available 7 days a week, evenings, weekends, and holidays. Or email us at gcho@loancabin.com.

Gustan Cho NMLS ID # 873293

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