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Revisiting FHA Non-Traditional Credit and Today’s Credit Market

by Heindrick So
November 10th, 2008

When HUD issued a letter back in April regarding non-traditional credit evaluation, we covered the basics and explained how it was a great solution for many individuals. Today, I wanted to revisit this topic and remind individuals how it applies to our current credit market. Unless you’ve been living under a rock the past year or so, you know that the credit markets are suffering and are responding by tightening up their loan guidelines. 

FHA loans have since filled the void recently, but FHA approved lenders have shown they are just as susceptible to the markets. Specifically, in terms of considering non-traditional credit evaluations, some lenders have either fled away entirely from no credit borrowers or have implemented various pricing hits for these types of loans.  More importantly, these reactions remind us of two key FHA fundamentals and how the FHA operates. 

1. Discerning Lender Criteria From FHA Standards
Since FHA does not directly issue loans and only insures loans, borrowers and consumers are still susceptible to the criteria of specific lenders themselves. In the case of no credit borrowers, these lenders have reasoned the elimination non-traditional credit loans because they simply can’t sell them on the secondary markets. In addition, certain lenders who accept non-traditional credit underwriting penalize borrowers with pricing hits, also known as “add-ons”. It’s a reminder that while FHA has its own set of standards, lenders are still allowed to implement their own underwriting criteria.

2. The Importance of Shopping Around Even With FHA
When considering FHA loans, you should not forget to shop around like you would for any other traditional mortgage. Although the loans are insured by the same government, borrowers need to understand that different FHA approved lenders will mean different loans. While the variations may be ever so slight, like any mortgage, it is still worth shopping around to make sure you get the best deal. In the case of non-traditional credit for example, choosing different lenders could mean the difference between owning a home and being stuck with renting. 

 

What is Non-Tradtional Credit?
If you’re new to the site and missed our initial post, or still unsure what non-traditional credit means, you can view the entire post here. Otherwise, here’s a quick recap of how HUD considers non-traditional credit for FHA loans:

Nontraditional Credit-Basic Guidance
The following provides guidance in establishing that a borrower has sufficient credit references for evaluating bill paying habits, which include: three (3) credit references, including at least one from Group I, covering the most recent 12 months activity from date of application. Group I references should be exhausted prior to considering Group II for eligibility purposes, as Group I is considered more indicative of a borrower’s future housing payment performance. Borrowers with no Group I trade references will be underwritten using the criteria set forth under “insufficient credit” below.

Group I - 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.

Group II – 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.

If you need more specific advice, you can contact an FHA lender in your area using our FHA Lender Directory. And if you have a question for us or simply want to know more about non-traditional credit evaluation in FHA loans, feel free to leave us a comment in the comments section below.

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This entry was posted on Monday, November 10th, 2008 at 11:51 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Revisiting FHA Non-Traditional Credit and Today’s Credit Market”

  1. DLMRWN Says:

    What documents are required for a non-traditional line of credit? Documents of all the check numbers written printed from the bank to one creditor (property managemtn for rental payment? A letter from the creditor (property managemtn) to support the documents of all the check numbers written and printed from the bank. What if the home loan underwriters won’t accept cancelled checks written by your wife, when you have a joint account? What if you had your auto insurance company write a letter and provide a billing summary from them stating that you had paid on time? What if that is not enough to prove your non traditional line of credit, as I do show one line of credit on my credit report from the credit bureaus and all my income and debt-to-income ratio are great. Where should someone turn to, because they would not accept these forms provide per their request?

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