For some borrowers without an established credit report, they can use what is called “non traditional” credit or “alternative credit,” which might be acceptable with FHA financing. It requires that you show credit worthiness that does not appear on a credit report. You must have documentation from at least three different sources that prove you made on-time payments during the prior 12 months.
Some of the potential types of non-traditional credit include payments on utilities, rent, insurance, internet, cell phone, child care services, personal loans, or department stores/layaway. It is recommended that you also have a documented history of regular deposits to a savings account over the past 12 months. If you have automatic payments from your payroll that go toward debt, this type of payment plan does not count as non-traditional credit. Lenders want to see voluntary timely payments.
To prove these payments, you need to have copies of canceled checks or a written letter from the creditor that indicates you made on-time payments during the last 12 months. The letter should include the payment amount and the total amount due.
To qualify for a non-traditional credit approval with FHA, over the last 12 months you must have no late payments for housing, no reported collections activity and no more than one late payment notice. Another requirement is two months of mortgage payments held in reserve. When you use non-traditional credit, the mortgage is a “manual underwrite,” which means it takes more time for the underwriting process because it’s reviewed by a human not a machine.