The Mortgage Porter

EDITORS NOTE: This post was originally published in 2008. Underwriting guidelines ALWAYS change. Please contact me if you have any questions.

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.