How HUD evaluates nontraditional credit for FHA mortgages
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.
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.
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.
- Fewer consumers have debt accounts in collection, NY Fed report finds – Implementation of tighter credit reporting standards has meant a steep drop in collection demerits and an average 11-point increase in credit scores, says a New York Fed study ...
- Poll: 2 out of 5 Americans think age, marital status affect credit score – More people are checking their credit scores than four years ago, but about 40 percent of consumers have misconceptions about what affects your credit ...
- Credit scores: Is 1 percent utilization better than 10 percent or zero? – Carrying over a tiny card balance can give you a credit score boost, but paying in full is better for your financial health ...