How to Use Non-Traditional Credit to Get a Mortgage 

October 16, 2019
House, Home Ownership, Domestic, Residential

Finding your forever house can be difficult. What’s even harder is getting accepted for a loan to buy that dream house, especially if you have bad or no credit. That’s why many borrowers are looking to bank statement loans to help them finance their house. 

Mainstream mortgage lenders will not grant you a home loan without pulling a mortgage credit report. Using non-traditional credit, you can enhance your credit score and qualify for the mortgage you need. 

Traditional and Non-Traditional Credit

Traditional Credit

When companies report their accounts receivable to Experian, TransUnion, and Equifax, that’s called traditional credit. Banks, mortgage lenders, credit card accounts, and other finance companies will typically fall into that category. 

Landlords, utility companies, layaway accounts, and secured credit cards do not report. These accounts are called non-traditional credit. Non-traditional accounts are typically only reported when the history is negative. If you make all of your payments, you do not benefit in terms of a better FICO score (a figure that measures your credit trustworthiness). 

Non-Traditional Credit

Traditional credit reports exclude many people who are considered credit risks. Getting financing relies on FICO scores, which is a problem for many potential homebuyers and lenders. Without better information that includes non-traditional credit, they are missing out on opportunities. 

To qualify as non-traditional, a bill must be recurring. A one-time charge is not a recurring bill and will not qualify as lenders need to see that you can regularly make payments. Typically, you will need at least one year of non-traditional credit for it to count. Some lenders may require more than 12 months, so it’s important to understand your lender’s guidelines. 

Examples of Non-Traditional Credit

As you have just learned, non-traditional credit is something that you pay regularly or a monthly basis. Here are some examples:

Rent: Rent is a monthly recurring cost that shows lenders that you pay your bill on time and have a housing history. Lenders need to know that you are used to paying for housing. 

Insurance Payments: If you pay car, rental, or health insurance on a monthly basis, they may count towards your non-traditional credit. 

Tuition Payments: If you pay your tuition monthly and the school can verify that you make the payments at the same time every month, it may count. However, if you pay your tuition once a year, it will not count. 

Utility Payments: Your electric, gas, and phone payments may also count as separate credit lines that could help you get a mortgage. 

Each lender will differ on the credit lines they allow. You should gather as much evidence of any credit lines you have so that you can easily show them to your lender. 

Building Alternative Credit 

If you don’t have traditional credit to rely on, you can focus on building your alternative credit. Always pay by check or online and not with cash so you can track it much easier and have a record that lenders can verify. 

Read More: Alternative Mortgage Lending and Credit Easing

Building a Traditional Credit Score

Although you may be able to qualify for a mortgage without a credit score, you will have fewer restrictions if you do have one. Here are some ways to help you build a credit history. 

Secured credit cards: Your local bank may have an option for you to deposit money into an account and use it to be issued as a credit card. The longer you use your credit card, the more credit you will build, helping you to have a score history that will allow you to apply for a regular, unsecured card. 

Pay your bills on time: After you’ve opened a credit card, make sure to pay your bills on time. Payment history has a huge impact on your credit score, and paying on time is the best way to build your score. 

Open a regular credit card: Once you have a credit history, you can open a credit card and use it as often or as little as you like. However, in order for the card to generate a score, it must be used regularly and you must make payments on time. 

Credit builder loan: These loans are offered by banks, credit unions, and online lenders. The bank will deposit a small sum of money into a savings account or CD for the borrower, and the borrower will make payments on the balance over a set period of time and receive the money after the payments are made. 

How Do Lenders Verify Non-Traditional Credit Histories?

Lenders will often take additional steps to verify your payment history. This will come in the form of a non-traditional credit report that can be provided to verify all of the information if you aren’t able to provide that information yourself. However, this process only works if the accounts that need to be verified can be verified through a third party. 

Qualifying for a Mortgage 

The non-traditional credit route is only available to those with no credit. If your credit is poor or bad, you will not qualify for this option. Even if you don’t have enough data on your traditional credit report, you can still qualify for a mortgage.

Lenders must establish an acceptable non-traditional credit profile when they do not have a credit score. Underwriters must obtain rental payment, and utility payment histories, including regular deposits to a savings account to prove financial responsibility. 

Good History of Repayment

Buying a home without traditional credit can be difficult, but alternative credit is making it easier for you to do. If you haven’t pursued traditional credit, the best thing you can do to help ensure that you get a mortgage is to pay all of your bills on time and in full. You won’t build traditional credit this way, but having a good history of repayment will help you purchase a home in the future. 

Remember, not all mortgage companies will offer no credit score underwriting options. If they do offer this option, it may only be on select programs. 

Make sure to contact a loan officer and talk to them first. Also, be prepared to provide them with the documentation needed to verify a non-traditional credit payment history. 

Contact us today to learn more about how non-traditional credit can help you get a mortgage.