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How HUD evaluates nontraditional credit for FHA mortgages

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Here are some of the guidelines issued earlier this year by the U.S. Department of Housing and Urban Development for establishing and evaluating nontraditional credit histories.The U.S. Department of Housing and Urban Development establishes and evaluates nontraditional credit histories.

Though the rules apply only to mortgages insured by the Federal Housing Administration, they tend to reflect the state-of-the-art in the financial industry concerning nontraditional credit histories -- and that means consumers should be aware of them.

Basic guidance
Evaluating bill-paying habits:
Three credit references are needed, including at least one from Group I, covering the most recent 12 months of activity. Group I references should be exhausted prior to considering Group II, as Group I is considered more indicative of a borrower's future housing-payment performance.

  • Group I: Rental housing payments, utility company references (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, canceled checks or other documents should prove regularity of payments.
  • Group II: Insurance coverage, i.e., medical, auto, life or renter's insurance; payment to child care providers; school tuition; retail stores -- department, furniture, appliance stores or specialty stores; rent-to-own; payment of medical bills not covered by insurance; Internet/cell phone services; a documented 12-month history of saving by regular deposits, 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 canceled checks.

Verifying nontraditional credit: All nontraditional credit references should be verified by a credit bureau and reported back to the lender as a nontraditional mortgage credit report in the same manner as traditional credit references. The nontraditional credit report should include the creditor's name, date of account opening, high credit, current status of the account, required payment, unpaid balance, and a payment history. It should not include subjective statements such as "satisfactory, acceptable, etc." 

Only if a nontraditional mortgage credit report is impractical or such a service is unavailable may a lender attempt to obtain independent verification of trade references.

In addition, FHA said it has no objection to the use of service providers that are able to develop a bill payment history (such as Payment Reporting Builds Credit or PRBC), as well as a score by obtaining rental payment history, utility trade-lines, and other common recurring bill payments. FHA-approved lenders may use such services to develop a credit history for borrowers with no or little traditional credit.

See related: Consumers, credit bureaus grapple with 'thin file' problem

Published: October 31, 2008


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Updated: 12-06-2016


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