Non-Traditional Credit In Mortgage Qualification Process

In this blog, we will cover non-traditional credit in mortgage qualification process.  There are cases where mortgage borrowers do not have any credit scores. It is very common for recent college graduates to not have any credit scores. Recent college graduates are eligible to qualify for a mortgage with no credit scores.

Borrowers with no credit scores need the file to get downgraded to a manual underwrite. Mortgage underwriters will require non-traditional credit tradelines. Non-traditional credit tradelines are creditors that do not report on all three credit bureaus. In the following paragraphs, we will discuss non-traditional credit in mortgage qualification process.

The Reason Why Some Mortgage Loan Applicants Have No Credit Scores

There are instances where some mortgage loan applicants have no credit scores. This is typical for recent college graduates or borrowers who filed for bankruptcy and/or had a foreclosure and did not rebuild or re-establish new credit after the bankruptcy and/or housing event.  The main reason for no credit scores is due to them not having any credit tradelines that report on the three credit bureaus

Qualifying For An FHA Loan With No Credit Scores

There are many consumers with no credit scores. They do not have a credit score from any of the three credit reporting agencies. The reason they do not have a credit score is that they have no active creditors reporting their payment history to the credit bureaus. Many folks who have filed for bankruptcy do not want anything to do with credit. Therefore, they do not want to re-establish credit with any creditors.

Why Consumers Do Not Have a Credit Score

Whatever they purchase, they purchase it with cash. This includes groceries, clothes, groceries, hardware, and even high-ticket items such as cars and appliances. Unfortunately, not re-establishing credit after bankruptcy is not a good thing for a consumer when it comes to buying a house, getting insurance, or in the event, they need to get credit. Insurance companies price insurance premiums on the consumer’s credit scores.

Importance of Credit Scores In Pricing Mortgage Rates

The higher the credit score the lower the insurance premium. It is common for recent college graduates not to have a credit score because they were dependent on their parents while they were in college.

The good news is people with no credit scores can still qualify for a mortgage without credit score. It needs to be a manual underwrite. Mortgage underwriters still need to review the past credit history and payment history of the borrower. This is done by requiring non-traditional credit tradelines. Non-traditional credit tradelines are credit tradelines that do not report to the three credit bureaus.

What Are Non-Traditional Credit Tradelines

Non-traditional credit tradelines are creditors that do not report to the three credit bureaus. Examples of non-traditional creditors are insurance companies, utility companies, cellular companies, gym memberships, cable and internet providers, and other creditors that do not report to the three credit bureaus.

Are Credit-Tradelines Required To Get Mortgage Approval?

Many lenders will require three credit tradelines that have been seasoned for at least 12 months in order for them to approve a borrower The 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. The only way for mortgage underwriters to predict credit risk is by reviewing the prior credit history of borrowers Non-Traditional Credit For Borrowers with no credit tradelines is permitted.

Verification Of Mortgage And Rental Verification: Mortgage And Rental History

Mortgage/Rental History:

Mortgage/Rental History is very important. Verification of mortgage and/or verification of rent are strong non-traditional credit tradelines. 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.

How Can Rental Verification Be Valid To Be Used By Lenders

Rental and/or mortgage verification can only be proven if the borrower has paid their housing payment with a check and/or bank wire or online. The borrower needs to provide a history of 12 months of timely payments via canceled checks, online payments, or bank wire. Gustan Cho Associates allows borrowers who are living rent-free with families to be exempt from verification of rent. It will be exempt as long as the rent-free status can be documented and the reason for living rent-free is to save money so they can save for a home.

Traditional Versus Non-Traditional Credit In Mortgage Qualification Process

Traditional Credit is credit tradelines that report on credit bureaus. In order to be considered a credit tradeline, the consumer needs to have a history of making monthly payments for the past 12 months.

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. The consumer needs to have been making payments to the creditor for at least 12 months or longer. Just getting a secured credit card and making a few payments that have not been seasoned for 12 months is not considered a credit tradeline.

Typical Non-Traditional Credit Tradelines

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
• Mortgage Verification
• Internet monthly payments
• Any other creditors that do not report on credit bureaus

In order to be considered non-traditional credit tradelines, the consumer needs to have made at least 12 monthly payments to the creditor. If the consumer opened up an account and made payments for a few months, it does not count as a non-traditional credit tradeline.

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 an NTMCR is impractical or the service is not available. Non-Traditional Credit may be used when borrowers don’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 the 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 a verifiable credit payment history
• Enhancement of poor payment history of the 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 the elderly can be used as non-traditional credit tradelines. It needs to be made to a business that provides such services 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 are 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 the mortgage qualification process works is the following:

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

Example of Non-Traditional Credit Tradelines

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 need to include 12 months of payment history with the following terms:

• No history of late payment on rental payments
• No more than one thirty-day late payment 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 are 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 the prior 12 months.
• No more than one 30-day late payments
• No collection accounts were filed in the past 12 months other than medical collections
• Front-end debt to income ratios not to exceed 31% DTI and a 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 us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on government and conventional loans. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. Or email us at gcho@gustancho.com.