Do you have a thin credit file? It’s not that you have negative credit information, you just don’t have anything to report. This can turn lenders off from giving you a mortgage unless you have non-traditional credit sources that you can use.
We are all so programmed to look at our credit score when we want to take out a mortgage. While that’s the typical method to get a mortgage, there are ways around it if you don’t have any credit reporting. This isn’t for borrowers that have ‘bad credit scores.’ It’s for borrowers that have no credit lines reporting, and need a way to show lenders that they are a good risk.
What is Non-Traditional Credit?
Non-traditional credit, as the name suggests, is credit other than what you see on your credit report. It’s reported from third-party sources that show that you make your payments on time. Non-traditional credit is typically any account that you have with a vendor that doesn’t report to the credit bureaus.
In order to qualify as non-traditional credit, it must be a recurring bill. For example, a one-time charge for tuition at a school isn’t a recurring bill. It needs to be something that you pay regularly, preferably monthly, and that the lender can verify that you pay it on time on a regular basis.
Typically, you need at least 12 months of non-traditional credit in order for it to count. Some lenders, however, may require as much as 24-months of non-traditional credit. It depends on the lender and the chosen mortgage program.
What Counts as Non-Traditional Credit?
We already established that non-traditional credit is something you pay on a regular basis. The following are examples of the most common sources:
- Rent – This not only shows that you pay your bill on time, but also that you have a housing history. Lenders like to know that you are used to paying for housing so that you don’t have too much payment shock when you do take on a mortgage.
- Insurance payments – If you pay your car, rental, or health insurance on a monthly basis, it can count as a credit line.
- Tuition payments – If you make monthly tuition payments and the school can verify that you make the payments at the same time each month and on time, it could count.
- Utility payments – Your payments for gas, electric, and the phone can also count as separate credit lines.
Each lender differs in the non-traditional credit lines they allow. Gather as much evidence of any potential credit lines you have and show them to your lender. Put most of your focus on the housing history, though, as most lenders want to see a housing history for any loan.
How do Lenders Accept Non-Traditional Credit?
The nice thing about lenders accepting non-traditional credit is that they have to do what they call a manual underwriting. Rather than your application going through an automated system and the computer spitting out an approval or denial, a human underwriter evaluates your loan application.
The underwriters have specific guidelines that the loan program and/or specific lender require. They usually take these situations on a case-by-case basis. In other words, they don’t have a specific threshold you must meet, as you would with a standard loan with traditional underwriting.
Consider Government-Backed Loans for Non-Traditional Credit
FHA loans are often the easiest loans to use non-traditional credit sources on when you want to get a mortgage. This may vary by lender since each lender can have their own overlays, but your chances are the highest.
The FHA does require that:
- You made all of your housing payments on time. This includes your rental payments. If your landlord can’t confirm that you made your payments on time, you won’t be eligible for an FHA loan.
- You can only have one 30-day late payment on your utilities or any other non-traditional credit line that you use.
- You cannot have any current judgments or collections.
Subprime Lenders are an Option Too
If you can’t get an FHA loan, there are numerous subprime lenders that offer the use of non-traditional credit. These lenders are typically your smaller lenders in the community. They write their own loans and keep them on their books. This enables the lenders to make up their own rules and decide which loans are worth the risk and which aren’t worth it.
Non-traditional credit doesn’t prevent you from getting a mortgage, but it can be an obstacle. You may have to do a little more work than you would with traditional credit, but with the right steps, you can get the mortgage that you need.