10.6 OBTAINING NON-TRADITIONAL CREDIT HISTORY (03/09/16)

Owned by Kacey Olson
Nov 17, 2018
3 min read

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

Some applicants may not have an established credit history, but credit verified through alternative sources may indicate a willingness to pay recurring debts. Neither the lack of a credit history on a traditional credit report nor the applicant's decision to not use traditional credit can be used as a basis for rejection. For this type of applicant, the lender will utilize alternative credit verification to establish the applicant's willingness to repay the requested loan. The alternative credit tradeline may be open, closed and/or paid in full by the applicant. It must have at least 12 months of repayment history reported to be a valid alternative source to support validation of a credit score. The lender may develop a Non-Traditional Mortgage Credit Report (NTMCR). A NTMCR may be used as a substitute for an RMCR or MMCR/TRMCR. An NTMCR may not be used to offset derogatory references found in the applicant's RMCR or MMCR/TRMCR; it should not be utilized to enhance the credit history of an applicant with a poor payment record or to manufacture a credit report for an applicant without a verifiable credit history.

The preferred method is all nontraditional credit references 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 and uploaded into GUS. Supplemental credit reports cannot be uploaded into GUS. See Section 5.2A of Chapter 5 of this Handbook for additional guidance.

If a NTMCR is impractical, or such a service is unavailable, a lender may choose to obtain independent verification of trade references. Two trade references are required when at least one of the trade references includes verification of rental housing payments or mortgage loan payments. If unavailable, at least three trade references must be used to determine if an applicant has a sufficient credit history. Traditional tradelines with a 12 month payment history listed on the credit report can be combined with eligible nontraditional tradelines to obtain the required number of tradelines noted in this paragraph.

Acceptable forms of documentation for a NTMCR include:

  • Cancelled checks;
  • Third-party verifications; or
  • Non-traditional credit report for the following non-traditional credit sources that include the creditor's name, date the account was opened, account balance, monthly payment due, and payment history reported in 0x30, 0x60, 0x90 format. Subjective statements such as “satisfactory” or “acceptable” are not an acceptable format for repayment history confirmation. Rural Development will accept reports by providers who develop bill payment histories.

Acceptable non-traditional tradeline sources include recent 12-month payment record of the following:

  • Rent payments;
  • Utility payment records (if utilities were not included in any rent payments) such as gas, electricity, water, land-line home telephone service or cable TV;
  • Insurance payments (excluding those premiums paid through payroll deductions, for example - employee group health plans) such as medical (other than those provided as an employee benefit through salary), automobile, life and household, or renter's insurance. Insurance premiums paid other than monthly, such as quarterly or annually, will require documentation that meet a full 12 months history of payment;
  • Payments to child care providers – made to a business providing such a service;
  • School tuition;
  • Payments to local stores (department, furniture, appliance and specialty stores);
  • Payments for the uninsured portions of any medical bills;
  • Internet/cell phone services;
  • Automobile leases;
  • A personal loan from an individual (other than a family member) with repayment terms in writing and supported by cancelled checks or money order receipts to document repayment;
  • A documented 12-month history of saving by regular deposits (at least quarterly/non-payroll deducted/no NSF checks reflected), resulting in a reserve account equal to three months of proposed mortgage payments (PITI) as a cash reserve post-closing; or
  • Any other reference which gives insight into the applicant's willingness to make periodic payments on a regular basis for credit obligations.

Payments made to relatives for credit sources are ineligible as a non-traditional trade reference.

For this section a recent account is defined as an account which was closed no more than six months from the guaranteed loan application with the lender.

Lenders should exercise caution when evaluating applicants with non-traditional credit histories. Generally these applicants may be considered a higher risk than applicants who have credit scores meeting the criteria in this Chapter. Applicants may only have one 30 day delinquency on any non-traditional trade line within the last 12 months. 60 and 90 day delinquencies, as well as reports of disconnection notices or collection accounts/court records (other than medical) filed in the past 12 months are unacceptable. Ratios for housing expense and debt-to-income expense should be minimal.