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FHA Loan Rules For Non-Traditional Credit

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One common type of question about FHA home loan applications involves how the lender process credit information. When a borrower wants to apply for an FHA loan and has plenty of “traditional credit”, there’s no problem developing and processing the loan application. But what about borrowers who come to the FHA loan process with little or no credit history or only what’s termed “non-traditional credit”?

Some borrowers don’t want or use credit cards, which makes establishing a typical credit history more difficult. That may lead some to believe that a lack of credit card can hurt your chances for FHA loan approval. But that’s not necessarily true. The FHA has rules and instructions for the lender in cases where the borrower has non-traditional credit. We find those rules and guidelines in HUD 4155.1 Chapter One, Section C.

It says in part, that a “Non-Traditional Credit Report” or NTMCR can be used to “assess the credit history of borrowers who do not have the types of trade references that normally appear on a traditional credit report. An NTMCR can be used as a

  • substitute for a TRMCR or an RMCR for a borrower without a credit history with traditional credit grantors, or
  • supplement to a traditional credit report that has an insufficient number of trade items reported.”

In most cases, the NTMCR is the option used when the borrower has non-traditional credit, but some might be tempted to get an NTMCR when the traditional credit report may not reflect in the borrower’s favor, or when credit reporting data is simply non-existent. Is this practice allowed under FHA loan rules? No, according to Chapter One:

“An NTMCR cannot be used to

  • enhance the credit history of a borrower with a poor payment record
  • manufacture a credit report for a borrower without a verifiable credit history, or
  • offset derogatory references found in the borrower’s traditional credit report, such as collections and judgments.”

The lender has strict “rules of engagement” for using a non-traditional credit report, including this instruction from Chapter One; “A lender may use an NTMCR developed by a credit-reporting agency that documents all non-traditional credit references when the information in the standard credit report is not sufficient to make a prudent underwriting decision.” So we see that sometimes there may be traditional credit references that aren’t enough, or the credit references aren’t available to begin with, hence the rules for these types of non-traditional credit checks.

Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.

Joe Wallace - Staff Writer

By Joe Wallace

January 8, 2014

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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