August 11, 2023
FHA loans have flexible standards regarding the kinds of credit history a borrower brings to the loan application process. By that, we mean that applicants who have non-traditional or even insufficient credit history may be able to get a loan approved depending on the circumstances.
Getting a loan with insufficient credit history is harder, but borrowers can call the FHA at 1-800 CALL FHA to get a referral to a local housing counselor who can provide advice.
Applying For An FHA Loan With Non-Traditional Credit
Borrowers with non-traditional credit or insufficient credit history may be asked to provide additional documentation and paperwork as part of this process.
You could be required to furnish tax documents, utility bills, and/or any other recurring payment that could help establish credit history.
FHA loan rules in the FHA Lender’s Handbook explain the rules.
“The underwriter must evaluate the Borrower’s payment histories in the following order: (1) previous housing expenses and related expenses, including utilities; (2) installment debts; and (3) revolving accounts.”
Where non-traditional credit is concerned, the rules say this:
“The Mortgagee may independently verify the Borrower’s credit references by documenting the existence of the credit provider and that the provider extended credit to the Borrower.”
The lender, referred to above as the mortgagee, must verify both non-traditional credit and the company or companies offering the borrower such credit.
Verifying Non-Traditional Credit References
The lender must “review public records” to verify non-traditional credit information, obtain “a published address or telephone number for the credit provider,” and not simply accept the borrower’s word for it.
The lender must get 12 months of canceled checks or other proof of payment that shows the payments were made in full and on time.
The lender can use a variety of non-traditional credit sources, including insurance payments, child care payments, or any other installment-type payment.
Those are essential guidelines, especially if you’re considering an FHA loan application with a non-occupying co-borrower.
One issue some borrowers might be concerned with is whether applying for an FHA loan under these circumstances affects the maximum loan available–do people with non-traditional credit have a disadvantage in the FHA application process?
FHA rules say such borrowers may be able to qualify for a mortgage but must meet all requirements for loan approval.
In such cases, the lender is tasked with reviewing “the Borrower’s overall pattern of credit behavior, not just isolated unsatisfactory or slow payments, to determine the Borrower’s creditworthiness.”
