In the ever-changing world of lending, it has been announced that non-traditional credit will be ineligible for use on FHA and VA loans effective Monday, September 15, 2008. All borrowers must have a traditional credit history, with the exception of certain types of refinance transactions.
What is "Non-Traditional Credit?" Non-Traditional Credit is payment history that can not be documented by one of the major credit bureaus (TransUnion, Experian, Equifax). It is not uncommon for folks to pay cash for their belongings, not have credit cards, no car loans, etc...however maybe they have been paying their other bills in a timely manner - like a cell phone, rent, utilities, etc. Those types of items are not generally reported to the credit bureaus. In the past, a prospective buyer could document on-time payments by producing bank statements, cancelled checks, letters from the landlord, etc. This type of documenting of credit history not found on a credit bureau report will no longer be allowed for FHA and VA loans.
So under the revised guidelines, while a borrwer may have a stellar payment history and ability to repay a mortgage obligation - options for these types of borrowers are going away.
Per Marlena Olson with the Vitek Mortgage Group, these sweeping changes are being implemented by lenders across the board.
Listed below are several scenarios in order to provide additional clarification:
-Two borrowers with no credit scores: Ineligible for purchase.
-One occupant borrower with a credit score and one occupant borrower without a credit score: Eligible for purchase. The reported credit score is used for qualification and non-traditional credit does not need to be built for the borrower with no credit score. (Minimum 580 credit score is required for manual underwrites, Automated Underwriting decisioning requires one credit score.)
-Occupant borrower with no credit score and a non-occupant borrower with a credit score: Ineligible for purchase since the occupant borrower would be required to build non-traditional credit which is no longer acceptable.
-Occupant borrower with a credit score and a non-occupant borrower without a credit score: Eligible for purchase. The occupant borrower’s credit score is used for qualification. (Minimum 580 credit score is required for manual underwrites, Automated Underwriting decisioning requires one credit score.)
The last day to lock under current guidelines that allow Non-Traditional Credit scoring is September 14, 2008.
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