Sometimes an applicant does not have the necessary credit to qualify for a home loan, yet he is responsible with his finances and should qualify. This need is recognized with the HomeReady Home Loans program, allowing borrowers to use nontraditional credit in the place of credit trade lines that report on a credit report. The only borrowers that are able to use nontraditional credit, however, are those that do not have sufficient credit reporting – borrowers with poor credit reporting are not eligible unless there are special circumstances surrounding their poor credit and it can be proven that it was a one-time occurrence.
The Types of Nontraditional Credit
There are many different types of nontraditional credit you can use to qualify for HomeReady Home Loans. The following two trade lines are required in order to qualify for a HomeReady Loan:
- Rental payments – At least one nontraditional trade line needs to come from a housing source, which usually means rent, whether to an individual landlord for a home or the landlord of an apartment complex that occurred over the last 12 months.
- Utility payments – At least one utility payment must be able to be used for qualifying purposes. This includes electric, gas, and phone payments that occurred over the last 12 months.
You are required to provide at least three nontraditional trade lines in order to qualify for a HomeReady loan. As long as the above two trade lines are satisfied, the remaining trade line can come from any of the following categories:
- Insurance, whether medical, life, or auto that is reoccurring
- Tuition payments
- Gym memberships that are regularly reoccurring
- Daycare payments
The payments you use to qualify must have a history of at least twelve months and no more than one trade line can have a maximum of one 30-day late payment in the last 12 months.
Manual versus Automatic Underwriting
There is a fine line between the type of underwriting used for HomeReady Home Loans. Typically, borrowers that have sufficient credit qualify using automatic underwriting, which means a software program approves the loan file. There are certain times when an underwriter will have to manually underwrite your loan file, though, including if no borrowers on the loan have adequate trade lines to create a credit score. In this case, manual underwriting can work to your benefit because it makes it possible for a person to understand the dynamics of your file and whether or not you are a good risk.
Another benefit of having your loan application manually underwritten is the possibility of using qualifying income from a borrower that does not have adequate traditional or nontraditional credit to use. In this case, only 30 percent of the total income can come from a borrower without any credit, but 30 percent is a significant percentage to help a person qualify for the loan.
No Judgments or Collections
One of the hardest requirements to meet when you use nontraditional credit for a Home Ready Home Loan is to not have any judgments or collections that are outstanding. In addition, in the last 24 months, no new collections or judgments could have been filed. The only exception to this rule is medical collections. As a general rule, all collections whether medical or not, that are higher than $250 each or $1,000 in total, must be paid off before the HomeReady Loan can be approved.
HomeReady Home Loans are one of the only programs that allow the exclusive use of nontraditional credit in order to qualify. If there is one borrower that does have a traditional credit score, however, that score must be used, but can be done so in conjunction with the nontraditional credit of the co-borrower, helping to make the home purchasing process much more likely for those that live in a low-income or high-minority census tract.Click to See the Latest Mortgage Rates»