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SUBJECT: Nontraditional Credit Verification and Evaluation
The Federal Housing Administration (FHA) has long permitted mortgage lenders to establish a borrower’s credit history through nontraditional means, including the compilation of performance on rental payments; utility bills; telephone and cellular phone services; cable television service; payments to local stores, etc. This is further described in handbook HUD-4155.1 REV-5, paragraphs 2-3 and 2-4B.
This practice is appropriate when the borrower has insufficient trade lines with Equifax, Experian, or TransUnion and a credit bureau score cannot be derived. Mortgage lenders also may use nontraditional credit verification to augment “thin-file” credit reports where a credit score was generated but based on only a few trade lines. However, nontraditional credit reports may not be used to enhance any poor credit history on a traditional credit report.
This mortgagee letter provides guidance to lenders and underwriters for establishing and evaluating nontraditional credit histories and also describes FHA’s acceptance of those enterprises that can develop a verifiable credit history, no less than 12 months in duration, for borrowers with limited traditional credit. This guidance is effective immediately but must be considered for borrowers without traditional credit beginning with case numbers assigned 30 or more days after the date of this mortgage letter.
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