Lenders who offer loans insured by the Federal Housing Administration (FHA) can typically offer better mortgage terms than conventional lenders, as the FHA insures against the risk of a borrower defaulting on his loan. Eligible borrowers benefit from lower down payments, lower closing costs and, for applicants with an incomplete credit history, more lenient underwriting criteria.
FHA-insured loans are hardly a new product -- they have been around since 1934. The FHA does not make loans, but it backs the loans of other lenders. If the borrower falls delinquent on his mortgage payments, the FHA covers some or all of the shortfall. This insurance reduces the mortgage lender's risk, allowing him to offer more lenient lending criteria than conventional loans.
The U.S. Department of Housing and Urban Development (HUD) requires FHA mortgage lenders to conduct a credit analysis on each loan applicant, to determine the borrower's capacity to repay the debt. This includes verification of the applicant's credit score. Three credit bureaus in the U.S. track individual credit histories. These companies look at the applicant's debt, such as his credit cards and personal loans, and allocates a credit score that corresponds with how well that individual has historically handled his debt load. The problem is, credit bureaus cannot track a person if he has no credit cards or loans. In this scenario, FHA lenders must look beyond credit scores to determine the applicant's ability to repay debt.
FHA lenders cannot reject a mortgage application just because the individual lacks a credit history. HUD instructs its lenders to assess zero history applicants on alternative measures of creditworthiness. They do this by preparing a "non-traditional mortgage credit report" (NTMCR). A NTMCR is an assessment of the applicant's bill-paying history. It reviews rental and utility bill payments, school tuition fees, store cards, cell phone services and similar items which might not typically appear in a standard credit report. The report gives an overview of the applicant's payment history, which the lender reviews like a standard credit report.
Expanding a Credit History
The more NTMCR-type evidence you have, the better your chance of qualifying for a mortgage loan. You'll need to show an alternative payment history going back at least 12 months, and preferably more. Lenders typically look favorably on applicants with job stability, cash in the bank and a healthy income-to-debt ratio. Ultimately though, if your lender turns you down for a mortgage loan due to your lack of credit history, all you can really do is generate one. There are credit cards especially for people with zero credit history. These require a deposit of a few hundred dollars; the card has a matching limit, so you are in effect borrowing money from yourself. Pay the bills on time and, in six months or so, you'll have a credit score.
- US Department of Housing and Urban Development: Let FHA Loans Help You
- Money Crashers: What Is an FHA Mortgage Loan – Requirements, Limits & Qualifications
- US Department of Housing and Urban Development: Mortgage Credit Analysis for Mortgage Insurance
- Mary Baldwin Homes: Minimum Credit Scores for FHA Loans
- Nolo: When Can I Get a Mortgage After Foreclosure?
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