Documenting Nontraditional Credit on FHA Loans

This week an underwriter requested nontraditional credit verification from a client to be used as a compensating factor (I will address compensating factors in a future post). Nontraditional credit is made up of payments that are not reported to one of the three credit bureaus. Below is an overview of FHA’s requirements:

  • The borrower must obtain at least three credit references. At least one must come from Group 1.
    • Group 1
      • Rental housing
      • Utility company, including gas, electricity, water, home telephone, or cable TV
    • Group 2
      • Insurance coverage (not deducted from payroll)
      • Payment to child care provider
      • School tuition
      • Retail stores
      • Medical bills not covered by insurance
      • Internet/cell phone service
      • 12 month history of regular deposits resulting in an increased balance to the account
      • Automobile leases
      • A personal loan with repayment terms in writing supported by cancelled checks to document payments
  • The credit reference must include one of the following:
    • Cancelled checks for the previous 12 months to the creditor
    • A written letter from the creditor on their letterhead including 1) the client’s name and account number 2)stating that the client has made payments on-time during the most recent twelve months, and 3) including the payment amount and the total amount due.
  • Also, in order to satisfy the credit history requirement for nontraditional credit, over the last 12 months there must be
    • No history of delinquency on rental housing payments
    • No more than one 30-day delinquency on payments due to other creditors
    • No collection accounts/court records reporting (other than medical) filed within the past 12 months

Please contact me if you have questions about purchasing or refinancing in Virginia.


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