FHA Alternatives to Traditional Credit Scores
If you want to take out an FHA 203(b) loan, but you don’t have an established credit history, don’t sweat; the FHA has provided a variety of other ways in which you can prove your creditworthiness.
The most common way to do this is for a lender to either get a NTMCR, or nontraditional mortgage credit report from a credit reporting firm. Or, the lender can obtain other evidence of a borrower’s credit history from bills such as auto insurance, utility or rental payments. The FHA generally mandates that a lender get at least three credit references for a potential borrower, one of which must be either a rent payment, a telephone bill, or a utility bill such as an electric bill, tv bill, water bill, or internet bill.
If this isn’t possible, alternative sources of credit include:
Rent-to-own payments
School tuition for the borrower, their spouse, their child or a dependent
Insurance payments not deducted from a borrower’s payroll
An auto lease
A personal loan (must have repayment terms in writing and other documentation)
12-month savings history in a bank account with a constantly increasing balance
In general, these sources must show that the borrower has made all their payments on time for the last 12 months. In addition, the borrower must have no more than two 30-day late payments in the last 2 years. Plus, borrowers should not have any “major derogatory credit” during the last 12 months. Major derogatory credit “includes any payments made 90 or more days after the due date, or three or more payments made 60 or more days after the due date.”
Debt-to-Income Ratio (DTI) Requirements for FHA Borrowers Without Traditional Credit
Just like other FHA loan borrowers, borrowers without traditional credit scores are still subject to debt-to-income (DTI) requirements. However, for borrowers without credit scores, only the income from borrowers who are occupying the property counts toward the DTI. Income from co-borrowers who do not occupy the home will not be factored into the DTI calculation.