If you are paying cash for everything, this may be a good question for you to be asking. Is there ever a time when no credit is good credit?
When consumers don’t use credit (and rely on cash) or haven’t established credit, credit history has to be made up from past rental history, past utility bill payments, and other forms of non-traditional credit.
The use of non-traditional credit may apply to:
• Customers who have no traditional established credit history
• Customers who have delinquencies in their traditional credit history and are providing non-traditional references to demonstrate credit worthiness
Note: Non-traditional credit is never a “substitute” for a totally delinquent credit history. Customers who have established credit, all of which is delinquent, may not utilize non-traditional credit “in place of” delinquent accounts.
When reviewing loans with non-traditional credit, other aspects, such as ratios, income and job stability, must meet standard guidelines with no other layers of risk.
Exceptions will be considered by Underwriting, based on the explanation and circumstances of each case.
Non-Traditional Credit
The customer must provide sufficient credit references for evaluating bill paying habits, which include: three (3) credit references, including at least one from Group I below, covering the most recent 12 months activity from the date of application. Group I references should be exhausted prior to considering Group II for eligibility purposes, as Group I is considered more indicative of a customer’s future housing payment performance. Customers with no Group I trade references will be underwritten using the criteria set forth under “insufficient credit” below.
Group I
• Rental housing payments (subject to independent verification if the customer is a renter)
• Utility company reference (if not included in the rental housing payment) including gas, electricity, water, land-line home telephone service, cable TV. If the customer is renting from a family member, independent documents should be requested to prove regularity of payments, such as cancelled checks.
Group II
• Insurance coverage [i.e., medical, auto, life, renter’s insurance (not payroll deducted)]
• Payment to child care providers – made to a business providing such services
• School tuition
• Retail stores – department, furniture, appliance stores, specialty stores
• Rent to own [i.e. – furniture, appliances]
• Payment of that part of medical bills not covered by insurance
• Internet/cell phone services
• A documented 12-month history of saving by regular deposits (at least quarterly/non-payroll deducted/no NSF checks reflected) resulting in an increasing balance to the account
• Automobile leases, or a personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments
Verifying Non-Traditional Credit
Documents confirming the existence for a non-traditional credit provider may include a public record from the state, county, or city records, or other means providing a similar level of objective confirmation. To verify the credit information, a published address or telephone number for that creditor must be used as opposed to relying solely on information provided by the applicant. Rental references from management companies with payment history for the most recent 12 months may be used in lieu of 12 months cancelled checks. Credit references may also be developed via independent verification directly to the creditor or backed up with cancelled checks for the most recent 12 months evidencing a satisfactory credit history.
Evaluating Non-Traditional Credit
When evaluating customers with non-traditional credit histories, a satisfactory credit history at least 12 months in duration is to include:
• No history of delinquency on rental housing payments
• No more than one 30-day delinquency on payments due to other creditors
• No collection accounts/court records reporting (other than medical) filed within the past 12 months
Insufficient Credit
When evaluating customers with no credit references, or otherwise having only Group II references, a satisfactory credit history at least 12 months in duration is to include:
• No more than one 30-day delinquency on payments due to any Group II reference
• No collection accounts/court records reporting (other than medical) filed within the past 12 months
In addition, for such borrowers, to enhance the likelihood of homeownership sustainability, the following underwriting guidance is being provided:
• Qualifying ratios are to be computed only on those occupying the property and obligated on the loan, and may not exceed 31% for the housing-to-income ratio and 43% for the total obligations-to-income ratio. Compensating factors are not applicable for customers with insufficient credit references.
• Customers should have two months of cash reserves following mortgage loan settlement from their funds (no cash gifts from any source should be counted in the cash reserves for customers in this category).
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