**April 29, 2008**

> **MORTGAGEE LETTER 2008-11**

**TO: ALL APPROVED MORTGAGEES**

**SUBJECT: Nontraditional Credit Verification and Evaluation**

The Federal Housing Administration (FHA) has long permitted mortgage
lenders to establish a borrower's credit history through nontraditional
means, including the compilation of performance on rental payments;
utility bills; telephone and cellular phone services; cable television
service; payments to local stores, etc. This is further described in
handbook HUD-4155.1 REV-5, paragraphs 2-3 and 2-4B.

This practice is appropriate when the borrower has insufficient trade
lines with Equifax, Experian, or TransUnion and a credit bureau score
cannot be derived. Mortgage lenders also may use nontraditional credit
verification to augment "thin-file" credit reports where a credit score
was generated but based on only a few trade lines. However,
nontraditional credit reports may not be used to enhance any poor credit
history on a traditional credit report.

This mortgagee letter provides guidance to lenders and underwriters for
establishing and evaluating nontraditional credit histories and also
describes FHA's acceptance of those enterprises that can develop a
verifiable credit history, no less than 12 months in duration, for
borrowers with limited traditional credit. This guidance is effective
immediately but must be considered for borrowers without traditional
credit beginning with case numbers assigned 30 or more days after the
date of this mortgage letter.

**[Nontraditional Credit---Basic Guidance]{.underline}**

The following provides guidance in establishing that a borrower has
sufficient credit references for evaluating bill paying habits, which
include: three (3) credit references, including at least one from Group
I, covering the most recent 12 months activity from 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
borrower's future housing payment performance. Borrowers with no Group I
trade references will be underwritten using the criteria set forth under
"insufficient credit" below.

[Group I]{.underline} -- rental housing payments (subject to independent
verification if the borrower 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 borrower is
renting from a family member, request independent documents to prove
regularity of payments, such as cancelled checks.

[Group II]{.underline} -- 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 Nontraditional Credit]{.underline}**

We prefer all nontraditional credit references be verified by a credit
bureau and reported back to the lender as a nontraditional mortgage
credit report (NTMCR) in the same manner as traditional credit
references. A NTMCR is designed to assess the credit history of the
borrower without the benefit of institutional trade references and
should format as traditional references -- including creditor's name,
date of opening, high credit, current status of the account, required
payment, unpaid balance, and a payment history in the delinquency
categories of 0x30, 0x60 etc. It should not include subjective
statements such as "satisfactory, acceptable, etc."

Only if a NTMCR is impractical or such a service is unavailable may a
lender choose to obtain independent verification of trade references.
Documents confirming the existence for a nontraditional 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, lenders must use a published address or
telephone number for that creditor and not rely 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. If a method is
used to verify credit information or rental references other than NTMCR,
all references obtained from individuals should be backed up with the
most recent 12 months cancelled checks.

In addition, FHA has no objection to the use of various service
providers now operating that are able to develop a bill payment history,
as well as a score by obtaining rental payment history, utility
trade-lines, and other common recurring non-reporting bill payments.
While we do not endorse any particular service provider, FHA approved
lenders may use such services to develop a credit history for borrowers
with no or little traditional credit.

**[Evaluating Nontraditional Credit]{.underline}**

The following offers guidance in evaluating borrowers with
nontraditional 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]{.underline}**

The following offers guidance in evaluating borrowers 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]{.underline} on those
    occupying the property and obligated on the loan, and may not exceed
    31 percent for the payment-to-income ratio and 43 percent for the
    total debt-to-income ratio. Compensating factors are not applicable
    for borrowers with insufficient credit references.

-   Borrowers should have two months of cash reserves following mortgage
    loan settlement from their own funds (no cash gifts from any source
    should be counted in the cash reserves for borrowers in this
    category).

If you have any questions regarding this Mortgagee Letter, call
1-800-CALLFHA.

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner