A credit profile is often the foundation for any mortgage program. Without a high credit score, you often find yourself without any type of financing for a home. The Fannie Mae HomeReady™ program offers consumers the chance to be a homeowner without traditional credit, however. There are, of course, stipulations regarding who can qualify for this financing without a credit profile, though. Understanding the ins and outs of non-traditional credit may help you get into the home of your dreams.
What is Non-Traditional Credit?
Non-traditional credit is defined as credit you are granted by those that do not report to one of the three credit bureaus. For example, your landlord is a creditor as he gives you a place to live in exchange for monthly rent payments. He probably does not report your payments to the credit bureau, but he can qualify as a creditor for mortgage qualifying purposes if he completes a Verification of Rent or if you are able to provide proof of timely payments over the last 12 months, which is usually done with canceled checks. Other forms of non-traditional credit include insurance, utility, school tuition, and childcare payments. Basically any payment you make on a regular basis to a third-party that can verify your payments in an official way.
Who can Use Non-Traditional Credit?
There are only certain individuals that are allowed to use non-traditional credit to qualify for the Fannie Mae HomeReady™ program. If you have a credit profile, but it is not very good credit and it renders you with a denial on your loan application, you are not eligible to use non-traditional credit. The people able to use it include:
- Consumers that have no credit profile or a very small file which makes their score too low to qualify. The lender will have say in how many tread lines are considered a “small file” as opposed to a score that is too low due to poor use of your credit.
- Co-borrowers or family members that are not co-borrowers but are contributing income to the loan as stated by the requirements for the Fannie Mae HomeReady™ program may use non-traditional credit.
- Exceptions are made for certain borrowers that have poor credit that can be coincided with a one-time negative occurrence in their life, such as a job loss, death in the family, or illness. This is done on a case-by-case basis, however.
If you qualify to use non-traditional credit for the HomeReady™ program, your loan will be manually underwritten. This means an underwriter will go through your file piece by piece, rather than using the automated system to underwrite your file. This can work in your favor; however, as a manual underwriter can understand certain situations and grant exceptions that a computer may not be able to offer.
Proving your Non-Traditional Credit
Since there is no formal credit score to use for qualification purposes, you will have to do a little more legwork to use non-traditional credit. Most lenders require at least 12 months’ worth of proof of payments in order to ensure that you are a good credit risk. Canceled checks are the easiest way to verify your payments, but if you don’t have them handy, a written verification or Letter of Credit from the credit proving your last twelve months’ worth of payments were made on time may suffice. Most lenders will require you to provide at least 3 lines of credit in order to qualify you for the Fannie Mae HomeReady™ program with non-traditional credit.
The HomeReady™ program is very flexible in its guidelines, giving you plenty of opportunities to become a homeowner in a high minority or low income census tract. Because you can use the income of people that live with you, but may not be on the loan and non-traditional credit, you could easily find a way to own a home with a mortgage that has low rates and favorable terms.Click to See the Latest Mortgage Rates»