Types of Alternate Credit for FHA
Acceptable types of Alternative Credit for FHA Mortgages
According to the HUD Mortgagee Letter 2008-11, HUD has created two groups of references that can be used as alternative credit for FHA mortgage loans. These are used when the borrower’s credit file does not have enough information to create a credit score, or when the credit file produces a score with very limited credit. HUD stressed that these are not to be considered as an alternative to “poor credit.”
Basic Guidelines for FHA Alternative Credit
There must be at least 3 references that can show a solid bill payment history. All of these should cover the payment history of the most recent 12 months. At least one of these should be from the “Preferred” Group with the focus of references being mainly in the “Preferred” group. Once all options have been exhuasted with the “Preferred” group, then references from the “Secondary” group can be considered.
The “Preferred Group”
rental housing payments (subject to independent verification if the borrower is a renter), utility company reference (if not included in the rental housing payment), including gas, electricity, water, land-line home telephone service, cable TV. If the borrower is renting from a family member, request independent documents to prove regularity of payments, such as cancelled checks.
The “Secondary Group”
insurance coverage, i.e., medical, auto, life, renter’s insurance (not payroll deducted); payment to child care providers – made to a business providing such services; school tuition; retail stores – department, furniture, appliance stores, specialty stores; rent to own – i.e., furniture, appliances; payment of that part of medical bills not covered by insurance; Internet/cell phone services; a documented 12 month history of saving by regular deposits (at least quarterly/non-payroll deducted/no NSF checks reflected), resulting in an increasing balance to the account; automobile leases, or a personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments.
These alternative credit references must be verifiable. HUD’s preference is that they are verified by a credit reporting agency and that they create a “nontraditional mortgage credit report.” This report would be used by the lender just like a standard credit report would be used.
If a nontraditional mortgage credit report is not possible, HUD further requires that each reference be independantly verified and should be backed up by cancelled checks covering the last 12 months’ payment history.
In my next posting I will address what can be done if no references can be found, or if there no “Preferred” group references available.
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What can be done if I have no preferred group references available? We have only been renting at our present apartment for only 7 months. We had cable, home phone, and internet services for about 10 months. I have cell phone, auto loan, and credit card references already. Shouldn’t that be good enough to get financed?
@Agnes:
Thank you for your question. Based on the information provided, I would suspect that you have the credit file that would not require these alternative credit references. If you currently have established credit that is being reported to the credit bureaus, this does not really apply.
The alternative credit references listed here are for those with no credit or “thin” credit. A “thin” credit file would be one that has only a few references which are also short in the length they are open. In other words, the current references would not give any real basis for predicting future repayment.
If you are not sure, I would recommend competing an online application and see if you would be approved. Working with a mortgage professional, you can see exactly where you qualify and what would be needed to get financed.