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What FHA Can Do With No Alternative Credit

Earlier I began a 3 part series on Alternative Credit for FHA mortgage loans. Recently HUD released a memorandum letter to all lenders describing the types of Alternative Credit they are looking for. This includes alternative tradelines from 2 different credit reference groups. But what if you can’t provide options from these two groups?

HUD does offer guideance to lenders on evaluating alternative credit when only references from the Secondary reference group, or no alternative credit at all. If there are some references, a 12 month history with no more that one 30 day late is permitted. There should also be no collection accounts (beyond medical) nor any public records (judgements, liens, ect) filed within the past 12 months. In addition, underwriters will be held to tighter debt to income ratios to enure there is enough cash flow to maintain monthly mortgage payments. Finally, at least 2 months of cash reserves (enough to make 2 mortgage payments) should be available, which must be the borrowers own funds.

While HUD sets these guidelines it is important to understand that lenders have the freedom to adapt and add to the FHA guidelines when they approve a loan. So just because a borrower just fits in the guidelines does not mean that borrower will be approved. It is the job of the loan officer to help build a case to present to the lender and underwriter showing why that borrower deserves that a risk be taken on them.

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