Non-Traditional Credit Guidelines On Mortgage Loans

This ARTICLE On Non-Traditional Credit Guidelines Was PUBLISHED On December 10th, 2019

Non-traditional Credit Guidelines on government and conventional loans:

• Credit scoring models have been around since the 1950s
• Most Americans do not understand how credit scoring works
• There are many Americans who do not have a credit score
• There are multiple reasons why you may not have a credit score reporting
• In this blog, we will detail how to obtain a mortgage even if you do not have a credit score
• In order to close on a mortgage transaction without a verified credit score, you must produce “non-traditional credit” documentation
• Gustan Cho Associates do not have any LENDER OVERLAYS and are able to close mortgage transactions without credit score reporting

In this article, we will cover and discuss Non-Traditional Credit Guidelines on government and conventional loans.

Traditional Versus Non-Traditional Credit Guidelines

 

History of credit scoring and how it is used to qualify mortgage borrowers:

• Credit scoring has come a long way since the handshake agreement days
• Many years ago, in what seems to be a distant way of life, your word was your reputation
• Meaning if you did not pay back debts you acquired, your reputation would be tarnished, and people would not lend to you
• As we grew in population and spread out further from cities, a Universal Credit Scoring Model was necessary

In 1956 a mathematician and an engineer teamed up to create what is known as the first standardized and impartial credit scoring system.

Credit Reporting Model On Traditional Credit

The two individuals were Earl Isaac and Bill Fair.

• They created the Fair, Isaac, and Company which is now called FICO
• The scoring model FICO debuted in 1989
• They use an algorithm that weighs the following factors; payment history, amount owed, utilization, Length of credit history, types of credit used, and recent credit inquiries
• All of these factors are entered into an algorithm and a credit score is produced
• Each credit bureau has slightly different algorithms
• This is why your score with TransUnion, Equifax, and Experian are usually not the same number

Credit scoring, in general, is nothing new, in fact, Equifax is the oldest Credit Bureau dating all the way back to 1899.

• In 2003, the FAIR AND ACCURATE CREDIT TRANSACTION ACT came out In efforts to improve the accuracy of credit-related records
• This apt also entitles every American citizen a free credit report once every year

Please visit THIS LINK to obtain your free report. 

Importance Of Credit When Applying For A Mortgage

Credit scoring models have become a way of life.

• It is common knowledge that the higher your credit scores the lower the interest rate you will pay
• This is true for mortgage lending, personal loans, student loans, and auto loans
• While the Fair and Accurate Credit Transaction Act amongst other acts, has helped equal the playing field, credit scoring models are far from flawless
• Many believe these algorithms actually reinforced racial disparities that exist

Also, there are inaccuracies and data breaches that can affect one’s credit score.

Identity Theft

When your identity is stolen, it can be devastating to your credit score and take a long time to rectify the issue. Even though the credit scoring system may be flawed, it is universally accepted by all major industries. At this point, we do not know what the future of credit scoring looks like, but we do hope it is a system with more fairness across the board. 

Non-Traditional Credit Guidelines For Borrowers With No Credit Scores

 

What happens when you don’t have a credit score? 

• Not having a credit score can be a major problem when shopping for a mortgage
• You may have a credit score from your bank or a source like Credit Karma and not have a mortgage credit score
• Mortgage credit scoring is a different model
• Usually the strictest scoring model
• If you do not use credit, you may not have a credit score reporting

For example, if you only have medical collections reporting to the bureau’s, there is not enough data to furnish a true credit score. 

Applying For A Mortgage With Non-Traditional Credit

How to apply for a mortgage without a credit score?

Mortgage borrowers can qualify for a mortgage using non-traditional credit versus traditional credit:

• If you do not have a credit score reporting, there is still hope of obtaining a mortgage
• In fact, FHA, VA, Fannie Mae, and Freddie Mac all offer mortgages without credit scores

You will need to utilize non-traditional credit.

What Is Non-Traditional Credit Tradelines

What is non-traditional credit? 

• When a credit score is not reporting, the lender must create a paper trail documenting your payment history
• A borrower must have a housing payment as one of these payment references for conventional mortgages
• The lender must document a housing payment for a minimum of the most recent 12 months
• When documenting the housing payments, all housing payments must be on time without any 30-day late payments during the past 12 months
• The lender must utilize a second source of a payment history

This can be a utility bill, insurance payments, cell phone bill but most clearly document the borrower’s name and show no more than one 30-day late payment in the past 12 months.

Using Non-Traditional Credit On VA Loans

VA Guidelines On Non-Traditional Credit Guidelines:

• VA is the most straightforward for mortgages without a credit score
• Since a VA loan does not have a minimum credit score requirement, the use of non-traditional credit is allowed
• Underwriters typically like to see three credit references when utilizing non-traditional credit
• They must have 12 months of each account showing zero late payments

You may not have any non-medical collections or judgments within the past 12 months.

Using Non-Traditional Credit On FHA Mortgages

 

HUD Guidelines On Non-Traditional Credit Tradelines:

• FHA does a great job of allowing non-traditional credit
• The lender must verify 12 months with zero housing delinquencies, not more than one 30-day delinquency on any payments to other creditors and no collections allowed within the past 12 months
• The lenders must verify payments via bank statements

FHA also would like 2 months of reserves after closing costs when you are using non-traditional credit. 

Fannie Mae Non-Traditional Credit Guidelines

FANNIE MAE Guidelines:

• Fannie Mae has a strict set of guidelines for non-traditional credit
• The property must be a one-unit, primary residence in which each borrower occupies the property
• Manufactured housing is not allowed. non-traditional credit may only be used for purchase or rate and term transactions and must be a FIXED rate
• Loan to value is capped at 90% and debt to income must be below 40%

If all borrowers on the transaction are utilizing non-traditional credit, at least one borrower must complete homeownership education prior to closing. 

Freddie Mac Non-Traditional Credit Guidelines

FREDDIE MAC Guidelines:

• When utilizing non-traditional credit for Freddie Mac for a single-family home, each borrower must have at least two payment references
• Each payment reference must be for at least the most recent 12 calendar months
• At least one borrower must have a housing payment history
• If each borrower has a housing payment history, they all must be verified
• You may not have a 30-day late payment within the past 12 months
• Any non-housing non-traditional tradelines may only have one 30-day late payment reporting in the past 12 months
• A 60 day late or multiple 30-day late payments will disqualify the use of non-traditional credit
• There may not be any non-medical collections, judgments, or tax liens for the past 24 months

When utilizing non-traditional credit references, at least one borrower must participate in homeownership education classes. 

Qualifying For A Mortgage With A Lender With No Overlays

As you can see from this Blog, Gustan Cho Associates are experts on non-traditional credit. We offer all of our mortgage products without lender overlays. For any mortgage questions or questions on non-traditional credit, please contact Mike Gracz on 630-659-7644 or mgracz@gustancho.com. We have no lender overlays on government and conforming loans.