FHA has just published a significant update regarding the use of Nontraditional Credit with FHA loans. I've summarized what you and your clients need to know.
"Nontraditional Credit" means monthly obligations that a person may pay but that is not normally reported to the credit bureaus. Examples would be rent, utility payments, auto insurance, cell phone account, etc. Essentially, a nontraditional credit account would be any monthly obligation being paid to a business.
Borrowers with limited or no traditional credit must have a minimum of 3 alternative trade lines with a 12-month history. One of the 3 must be rent or housing utility payments, i.e., gas, electric, water, cable, land-line phone.
Borrowers with no traditional credit AND no rent or utility accounts will need:
•Two months cash reserves from their own funds (gifts are not allowed to meet this requirement);
•Ratios of 31% (for housing expense to income ratio) and 43% (for total debt to income ratio) cannot be exceeded; and
•No exceptions will be granted.
Additional underwriting criteria for nontraditional credit are as follows:
•No history of delinquency on rent payments;
•No more than 1 x 30 day late payment in the last 12 months on all other alternative trade lines;
•No collection or judgments filed within the last 12 months (excludes medical collections, which are evaluated by the underwriter); and
•All alternative trade lines must have a 12-month history.
For more information on FHA loans just give me a call or shoot me an email
