Alternative Credit for FHA Mortgages
HUD Clarification on Alternative Credit
A while back, I wrote an article dicussing how FHA mortgage loans are not Subprime Mortgage Loans. Obviously, too many loan officers are not getting that point very clear in their minds. With the lack of mortgage loans available to individuals with very poor credit, many loan officers that worked strictly in subprime lending have turned to FHA as their savior. This is causing a lot of trouble and a major backlog with many lenders in their government underwriting departments.
The mess has gotten so bad with many lenders that loans can take up to 30 days just to get their government deals looked at! This includes both FHA and VA mortgage loans!
So in an attempt to help bring loan officers back to reality, HUD has released a Mortgagee Letter (#2008-11) to clarify Nontraditional Credit Verification and Evaluation. In this letter HUD addresses using alternative credit references, when they can be used and how they should be verified.
The idea is that using these alternative tradelines is appropriate when a borrower does not have sufficient credit to create a credit score. Alternative credit can also be used to help support what is considered to be a “thin” credit file where a credit score is created but based on very limited credit. HUD does clairify that if the credit is in bad shape, you can’t simply turn in a payment history for a light bill and get it approved!
“nontraditional credit reports may not be used to enhance any poor credit history on a traditional credit report.” HUD Mortgagee Letter 2008-11
Alternative credit lines must have a solid 12 month history and be one of two groups of trade line references. In the next couple postings, I will go more into what these groups are and how HUD wants these references to be verified.
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