Nontraditional credit is a record of bills you've paid on time that never appear on a credit report: rent, electric, water, phone, internet, car insurance, child care. When a buyer has no credit score at all, the lender documents 12 months of those payments and uses them in place of a score. The loan is then usually approved by a person through manual underwriting, and it closes like any other.
What each program requires
FHA. The lender orders a nontraditional mortgage credit report or builds the history from your records. FHA wants three credit references, and at least one has to be rent, phone service (a cell phone counts) or utilities not included in rent. The others can come from insurance premiums you pay directly, child care, school tuition, a retail store card, a rent-to-own payment, medical bills, an auto lease, a 12-month savings history, or a personal loan with written terms and canceled checks. Each reference needs the most recent 12 months of proof. You still get FHA's maximum financing, so 3.5% down works. Ratios are capped at 31% for housing and 43% total, and only the income of borrowers who'll live in the home counts.
Conventional (Fannie Mae). On a manually underwritten loan, each borrower without a score needs four references (three on HomeReady), each with the most recent 12 consecutive months of history. The home has to be a one-unit principal residence, the loan has to be a purchase or a refinance with no cash out and stay within the baseline conforming limit, and total debt can't top 36%. If no borrower can document a housing payment history, Fannie Mae wants 12 months of reserves.
USDA. With 12 months of verified rent, you need the rent plus one more tradeline. Without rent history, you need three. Each tradeline needs a 12-month history and can't have been closed more than 6 months before the application. USDA grants no ratio waivers on these loans, so 29% and 41% are the limits.
VA. VA sets no minimum score of its own, and lenders set their own floors and their own policies for buyers without a score.
A worked example on $7,000 a month
Maria earns $7,000 a month gross, has never had a credit card or loan, and has paid $2,100 a month in rent on time for two years. Her phone bill and car insurance are paid from her checking account every month.
| Program | Housing limit | Total debt limit |
|---|---|---|
| FHA, no score | $2,170 (31%) | $3,010 (43%) |
| Conventional, manual | $2,520 (36%) | |
| USDA, nontraditional | $2,030 (29%) | $2,870 (41%) |
On FHA with 3.5% down, a $270,000 home has a $260,550 base loan, or $265,109.63 with the 1.75% upfront premium financed. At a 5.75% rate the payment comes to $2,163.28: $1,547.11 principal and interest, $213.75 property tax at 0.95% a year, $283 insurance and $119.42 monthly mortgage insurance (0.55% of the base loan ÷ 12). That's inside Maria's $2,170 limit and close to the rent she already proves she can pay.
Getting your references ready
- Ask your landlord or management company for a 12-month rental verification, or pull 12 months of bank statements showing each rent payment.
- Print a year of statements for phone, utilities and insurance, or canceled checks showing each payment.
- Keep every reference account open through closing.
- Pay with checks or transfers you can trace. Cash payments are hard to prove.
A secured card used lightly for six months will usually produce a credit score, which opens automated approvals with higher ratio limits. Run your income through the affordability calculator, and call AAA Capital Funding at 888-601-8344 to set up a no-score approval from your rent and bill history.