Every loan program has credit requirements; however, HomeReady™ Loans provide quite a few exceptions to the rule. There are minimum credit scores required for automatic underwriting of this program, but a large majority of homebuyers that use the HomeReady™ program take advantage of the ability to use manual underwriting and alternative credit in order to qualify. The only borrowers that are able to use non-traditional credit (credit not reported to a credit bureau) are those that do not have sufficient credit lines reporting. If this is the case, you can use alternative credit, such as utility, rent, and insurance payments.
Who Must use Traditional Credit?
As is the case with any loan, any borrower that has a credit score must use it for qualifying purposes. Alternative credit cannot be used in place of bad credit; it can only be used in the place of non-existent credit. If you have a traditional credit score, that is what is used to qualify you for the HomeReady™ program. In general, the following minimum scores are required:
- If you borrow more than 75% of the purchase price, your credit score must be higher than 680
- If you borrow less than 75% of the purchase price, your credit score must be higher than 620 (640 for an adjustable rate)
- If you have six months of reserves on hand, your credit score can lower to 660 if you borrow more than 75% of the purchase price
Using Non-Traditional Credit
Most borrowers end up using non-traditional credit because of the nature of the HomeReady™ Loans being made for borrowers in low-income census tracts. The stipulations regarding non-traditional credit are as follows:
- There must be at least three sources of non-traditional credit
- Each non-traditional credit line used must have at least a 12-month history
- One of the non-traditional credit lines must pertain to your housing, which is typically rent and cannot have any late payments within the last 2 years or since they started if there is not a 2-year history
- One of the non-traditional credit lines must be a utility payment, such as electric or gas
- Any other trade lines used must be able to be proven in an official format, which means in writing and with canceled checks to show the dates of the payments
- A few of the examples of non-traditional trade lines include insurance (auto, medical), tuition, and memberships
- Any other trade lines that are not housing payments cannot have more than one late payment in the last 12 months
- All collections and/or judgments must be paid in full and no new collection or judgment could have been initiated in the last 24 months
The Exception to the Rule
As is the case with many loan programs, there is one exception to the rule regarding who can use non-traditional credit. Borrowers that have a credit profile that is too low to allow them to qualify for the HomeReady™ program but can document that there was a one-time occurrence that caused their credit to fall may be able to use alternative credit trade lines. A few examples of the situations that are accepted include:
- Loss of a job that is not due to any wrongdoing on your part
- Death in the family
- Illness that made it impossible to work
- Injury that made it impossible to work
If you are going to use a one-time occurrence to use non-traditional credit, you will need to prove the situation and how it affected your income. This is usually easily done with medical records for injuries or illnesses or tax returns/W-2s for job loss. The proof that your income decreased significantly during that time as a result of the occurrence will help to prove that this situation was a one-time issue as long as you can now show that your income is back up to par and you are back to making your payments on time.
Proving Non-Traditional Credit
Since there is no official report that shows the use of non-traditional credit, you will be required to provide the proof that your payments were made on time for the last year or two. This can be done in several ways:
- Canceled checks that are consecutive over the last 12 months or longer
- Written proof from the vendor showing when you made your payments and their timeliness
You will need at least 3 trade lines with accurate proof in order for your non-traditional credit to be used for qualifying purposes.
As you can see, there are a variety of ways to qualify for HomeReady™ Loans whether you use traditional or non-traditional credit. If you are unsure about how you will qualify, talk to a few lenders to see how they view your credit and what you can do. If you know that your credit score fell as a result of a one-time issue, be prepared with proper documentation to prove your worthiness now and the ability to use non-traditional trade lines to qualify.Click to See the Latest Mortgage Rates»