B3-5.4-01: Eligibility Requirements for Loans with Nontraditional Credit (12/19/2017)

© Fannie Mae Single Family Selling Guide

Overview

If one or more borrowers do not have a credit score due to insufficient credit, the lender must establish an acceptable nontraditional credit profile. The lender must first check all three major credit repositories to verify the borrower’s credit history and confirm that the borrower does not have a credit score.

If the borrower’s credit information is frozen at one of the credit repositories, and no credit score is available from any other repository, the lender may underwrite the borrower following the requirements for nontraditional credit. If the borrower’s credit information is frozen at two or more of the credit repositories, the loan is not eligible as nontraditional credit even though no credit score is available.

The credit report will indicate if a credit score could not be produced due to insufficient credit. Lenders must ensure that the credit report accurately reflects the borrower’s information, such as the name, Social Security number, and current residence of the borrower to confirm that the lack of traditional credit was not erroneously reported because incorrect information was used to order the credit report.

Note: For certain loan transactions, one or more borrower(s) are required to have traditional credit as evidenced by a credit score. See below for additional information.

Unacceptable Uses

The establishment of a nontraditional credit history is not acceptable for the following scenarios:

The lender is able to obtain a credit score for the borrower despite the borrower’s limited use of credit.
The borrower has a sufficient amount of credit to obtain a credit score and the representative credit score is less than the minimum required.
Note: An exception is permitted for certain HomeReady loans for borrowers with low credit scores. See B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements, for additional information.
The borrower’s traditional credit history indicates significant derogatory references, such as a prior bankruptcy or foreclosure. In these cases, the borrower must have re-established credit in accordance with B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit, including the establishment of traditional credit and a credit score.

Manual Underwriting: At Least One Borrower Has No Credit Score

If one or more borrowers on the loan does not have a credit score and is relying on nontraditional credit to qualify, the following requirements apply:

The property must be a one-unit, principal residence.
The transaction must be a purchase or limited cash-out refinance.
The loan amount must meet the general loan limits—high-balance mortgage loans are not eligible.
The maximum debt-to-income ratio is 36%.
There is no minimum reserve requirement if at least one borrower can document a rental payment history as one source of nontraditional credit. Otherwise, a minimum of 12 months reserves is required. See B3-5.4-02, Number and Types of Nontraditional Credit Sources, for additional information.
Non-occupant co-borrowers are permitted, provided the requirements described in B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction, are met in addition to the eligibility requirements described above.
A nontraditional credit history must be documented for each borrower without a credit score. See B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History, for additional information.

DU Loan Casefiles: No Borrower Has a Credit Score

Lenders may submit loan casefiles to DU when no borrower has a credit score. DU will apply the following requirements:

The property must be a one-unit, principal residence, and all borrowers must occupy the property.
All property types are permitted, with the exception of manufactured housing.
The transaction must be a purchase or limited cash-out refinance.
The loan amount must meet the general loan limits—high-balance mortgage loans are not eligible.
The loan must be a fixed-rate mortgage.
The maximum LTV, CLTV, and HCLTV ratios are 90%.
The debt-to-income ratio must be less than 40%.
Reserves may be required as determined by DU.
A nontraditional credit history must be documented for each borrower without a credit score. See B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History, for additional information.

If a loan casefile does not receive an Approve/Eligible recommendation, the loan may still be eligible for manual underwriting. The lender must determine whether the loan meets the requirements for a manually underwritten loan that includes a borrower without a credit score.

DU Loan Casefiles: At Least One Borrower Has No Credit Score and Another Borrower Has a Credit Score

If one (or more) borrower(s) has a credit score and at least one borrower does not have a credit score, then DU will apply the following requirements:

The property must be a one-unit, principal residence, and all borrowers must occupy the property.
The transaction must be a purchase or limited cash-out refinance.
The loan amount must meet the general loan limits—high-balance mortgage loans are not eligible.
Reserves may be required as determined by DU.
If the borrower(s) with a credit score is contributing more than 50% of the qualifying income, the lender is not required to document a nontraditional credit history for the borrower(s) without a credit score.
If the borrower(s) with a credit score is contributing 50% or less of the qualifying income, the lender must document a nontraditional credit history for each borrower without a credit score. See B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History, for additional information.

Homeownership Education

If all borrowers on the loan are relying solely on nontraditional credit to qualify, at least one borrower must complete homeownership education prior to loan closing. See B2-2-06, Homeownership Education and Housing Counseling, for the requirements.