Documenting Alternative Credit with FHA Loans

EDITORS NOTE 12/13/2012: This post was written in 2008 and currently, our company (and many others) will not consider “alternative credit”. We now have a minimum credit score of 640 required.

FHA insured loans, which are quickly becoming the mortgage of choice unless you have 20% down payment and 720 credit scores, allows people to obtain mortgage financing if they are shy on an established credit history reported to the credit bureaus.  Typically, a borrower needs to the following shown on their credit report for it to be considered “established”: 

  • At least three trade lines (credit accounts) in good standing.
  • Two of the three trade lines must be at least 12 months old.
  • One trade line must be at least 24 months old.
  • Three credit scores per borrower.

Sometimes, if someone does not have established credit that is reported to the credit bureaus, they need to use “alternative credit” or “non traditional” credit, which may be acceptable with FHA financing.   Proving you have credit that is not reported to the bureaus requires that you obtain documentation from three different sources that you have made on time payments to during the last 12 months.   

Possible types of non-traditional credit (preferred–at least one of these types of sources are required):

  • rent payments
  • utilities (telephone, electricity, gas, water, garbage, cable, etc.)–not included in housing payment.

Other acceptable sources of non-traditional credit are (two out of three sources may come here):

  • insurance (medical, auto, life, renter’s, etc).
  • payment to child care providers
  • internet/cell phone service
  • personal loan with terms in writing supported with canceled checks
  • department, furniture, rent-to-own stores, etc.
  • a documented 12 month history of saving by regular deposits (at least quarterly) that are not payroll (automatic) deducted.

Note:  Debts that are paid automatically from your payroll are not allowed to be used in documenting non-traditional credit.  Lenders want to make sure that you are able to make timely payments “voluntary”.

The “form of proof” can be:

  • canceled checks for the last 12 months, or
  • written letter from creditor which is written on their letterhead, includes your name and account number stating the you have made on-time payments during the last twelve months.   The letter should include what the payment amount is and the total amount due.

In order to qualify for a non-traditional credit approval with FHA, over the last 12 months, there must be:

  • No late payments for housing.
  • No collections or court records reporting (with the exception of medical).
  • No more than one 30 day delinquency on payments due to other creditors.

Qualifying ratios are restricted to 31% for the payment to income ratio and 43% for the total debt to income ratio.   Two months reserves (two months mortgage payments in savings after closing) is also required.  When non-traditional credit is used, the mortgage is a “manual underwrite” meaning that you need to allow for more time during the underwriting process as a real live human is underwriting your transaction.   

Last but not least, do make sure that you are working with a Mortgage Professional who is qualified to provide FHA mortgage loans.  Not all mortgage companies are approved and, with many products no longer available, they may try to illegally provide an FHA mortgage with hopes of finding another lender to broker it to.  Ask your Mortgage Professional if they have provided FHA loans before, how long and how long their company has been approved for FHA loans.  By the way, I cut my mortgage teeth on FHA 8 years ago and our company has been providing FHA loans since our inception.  (We are a Direct Endorsed HUD lender).  You can always check out HUD’s site to confirm whether or not your lender is approved.

Questions or concerns about FHA (or any) mortgages for Washington State properties?  Contact me.


  1. helamangonzalez says

    570 credit score. excellent recent 5yr history with auto, att, etc bills. want 50-100k on free and clear 3br/2ba vaued at $450k. That’s a 11-22% LTV. Can I get 15-30 yr adjustable, fixed, or FHA?

  2. CapriWestbrook says

    If I am approved for a mortgage, but need alternative credit can I use my renter’s insurance? My car insurance was paid by my husband, which was late all the time and I do not want to use that for alternative credit. Rental history is in good standing, but the only bills that are in my name are rent, renter’s insurance, and car insurance. I need one more alternative.

    • I’m not sure of lenders who are doing alternative credit at this time. Have you met with a local loan officer to review your current credit situation?

      • CapriWestbrook says

        Yes. They told me to submit two alternative lines of credit because I have only one credit card. They sent a letter to verify my rent history and they told me to submit another alternative. They are accepting an alternative line a credit at this time.

  3. I have no credit history because everything was paid with cash. I would like to do non-traditional credit and would like to know what I need to purchase a home through FHA.

  4. Felicia hill says

    Hey. Just got preapprove to buy a home. I have to also give two alternative credit
    Letters. Do they (lender) go back and check to make sure your credit letters are accurate? Thanks

  5. we have a middle score of 695 but only have non traditional credit with 12 months of history we pay rent, Comcast, progressive car insurance is FHA the only way to go for us within the next few months scores should be at around 750 though but still no traditional and really want a home by summer what are your suggestions and what kind of rates are we likely to get

    • melanie, I’m not sure who’s accepting alternative credit at this time – especially with the new QM (qualified mortgage) rules that are in effect today which will cause most lenders to not do loans that need to be manually underwritten. You might want to try a credit union or start building traditional credit lines.

      • MaggieMae says

        You can originate any mortgage (whether or not it is a QM) as long as you make a reasonable, good-faith determination
        that the consumer is able to repay the loan based on common underwriting factors. You can continue to rely on your
        sound, tested underwriting guidelines that you have used in the past to make loans that have generally performed well,
        as long as you document the information you consider.
        Re: 01/10/14

  6. Hi i have a score of 664 and 2 Credit cards. And i have paper work for Sprint which i been with for over 5 years. And was wondering can i use my LA fitness account as another form of credit.

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