FHA Training - Using Nontraditional Credit

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For ages, your borrower’s nontraditional credit has been acceptable to use to qualify for FHA loans. In the past, though, HUD wasn’t very specific on exactly what they expected to see when alternative credit was used. Were letters from creditors acceptable proof or did it need to be added to a nontraditional credit report? What types of accounts are acceptable?

Good news! HUD has finally come out with a Mortgagee Letter on April 29, 2008 that specifically addresses all the requirements. I encourage everyone to be sure to read it thoroughly.

Among the highlights, HUD divides credit accounts into two groups and specifies that they want to see a 12 month history. Group One includes rental payments and utilities. Group Two includes accounts such as insurance, service providers, school tuition etc. The Mortgagee letter also goes into detail how these accounts should be verified, how many late payments are allowed (yes, some are!) and when cancelled checks are required. I won’t simply rewrite it here, since for once the Mortgagee Letter seems to be extremely clear.

The most important clarification, or change, is that if all your borrower’s credit references come from Group Two, you cannot apply any compensating factors and debt ratios must remain under 31/43. In addition, borrowers must have 2 months cash reserves which cannot be a gift. These two are probably the items most likely to affect current loans in your pipeline.

Tags: fha broker training, fha mortgages, FHA guidelines