Fannie Mae Guidelines: Nontraditional Credit References

When You Need Nontraditional Credit References

You need nontraditional credit references when you don't have a credit score from the major credit bureaus. This happens when you haven't used traditional credit products like credit cards, auto loans, or mortgages recently enough to generate a score.

Say you're a recent immigrant who paid cash for everything in your home country, or you're young and have avoided credit cards. Maybe you paid off all your debts years ago and haven't borrowed since. In these cases, your lender will need to document your payment history through nontraditional sources.

The number of references you need depends on your loan type and underwriting method. Most loans require 3-4 references, but HomeReady loans only need 2. Desktop Underwriter (DU) will tell your lender exactly what's required for your specific situation.

What Counts as a Nontraditional Credit Reference

Nontraditional credit references are bills or payments you make regularly that aren't reported to the credit bureaus. The key requirement is that you must make payments at least every three months.

Housing payments are the strongest references. These include rent payments to a landlord or property management company, payments on a privately held mortgage not reported to credit bureaus, or property tax payments if you own your home free and clear.

Other acceptable references include utilities like electricity, gas, water, phone, cable, or internet service. Your cell phone bill counts as a separate reference from your landline. Insurance payments work too - auto insurance, life insurance, medical insurance, or renters insurance.

You can also use payments to local stores like furniture or appliance stores, car lease payments, medical bills, school tuition, or childcare payments. Even a documented loan from an individual with written repayment terms qualifies.

Bank accounts count if they show regular deposits over 12 months with an increasing balance. Wire remittances to family overseas work if they show consistent amounts over the past year.

The 12-Month Payment History Requirement

Every reference must show 12 consecutive months of payment history. This means your lender needs documentation proving you made payments on time for the full year leading up to your loan application.

Your lender will conduct an interview to identify all your potential credit references from the past 12 months. They must document all references, not just the good ones. If you were late on your electric bill three times, that still needs to be included and explained.

If your lender orders a nontraditional credit report from a consumer reporting agency, that agency will conduct the interview and gather the payment histories for you.

Housing Payment Requirements

For loans underwritten through DU, you must include a housing payment as one of your nontraditional credit references. This could be rent, a private mortgage payment, or property taxes if you own your home outright.

Manual underwriting doesn't require a housing payment reference, but there's a catch. If none of the borrowers on the loan have any housing payment history, you'll need to document at least 12 months of mortgage payment reserves. This means extra cash in the bank to cover your future mortgage payments.

Say you're buying your first home and have been living with family rent-free. Your lender can still approve the loan manually, but you'll need to show enough savings to cover a full year of mortgage payments beyond your normal down payment and closing costs.

Documentation Requirements

Your lender needs written proof of each payment history. For rent, this means canceled checks, bank statements showing rent payments, or a letter from your landlord with payment records. Property management companies often provide detailed payment histories.

For utilities, you'll need 12 months of billing statements showing payment dates and amounts. The statements must be in your name - if utilities are included in your rent, they can't count as a separate reference.

Insurance companies can provide payment histories showing your premium payments over the past year. For store accounts, you'll need statements or letters from the merchant showing your payment pattern.

Bank account references require 12 months of statements showing regular deposits and an increasing balance. The deposits must happen at least quarterly to qualify.

Why Fannie Mae Requires These References

Fannie Mae needs to predict whether you'll make your mortgage payments on time. Without traditional credit scores, they rely on your track record of paying other bills regularly.

The 12-month requirement ensures your payment pattern is recent and relevant. A good payment history from two years ago doesn't predict current behavior as well as last year's performance.

Housing payments carry extra weight because they most closely resemble mortgage payments. Someone who pays rent reliably is more likely to pay a mortgage reliably than someone who only pays their phone bill on time.

The requirement for multiple references creates a fuller picture of your financial responsibility. One good payment history might be luck, but three or four different accounts paid on time suggests a pattern of reliability.

Common Problems and Complications

Utilities included in rent create the most confusion. If your rent payment covers electricity and water, you can't count those utilities as separate references. You need bills in your name with separate payment histories.

Automatic payments can complicate documentation. If your bank automatically pays your car insurance, you need to show both the bank statements proving the payments went out and the insurance statements showing they were received and credited.

Shared accounts create problems too. If you and your spouse share a cell phone account, only the person whose name is on the bill can use it as a reference. The other spouse needs different references.

Timing gaps can derail your application. If you switched cell phone providers 8 months ago, you might not have 12 consecutive months with either company. You'd need to combine records from both providers or find different references.

Payment frequency matters more than you might think. Quarterly insurance payments qualify, but annual payments don't provide enough data points. If you pay your car insurance once a year, it won't count as a reference.

Special Considerations for Different Loan Types

HomeReady loans offer more flexibility with only 2 required references instead of 3-4. This makes homeownership more accessible for borrowers with limited credit histories.

Manual underwriting gives lenders more discretion in evaluating your references. They might accept a reference that DU would reject, but they'll scrutinize your overall financial picture more carefully.

If you're applying for a loan that will be underwritten through DU, the system will specify exactly what type and number of references you need. These requirements can vary based on your specific situation, down payment, and other risk factors.

References

For the official guidelines, see B3-5.4-02: Number and Types of Nontraditional Credit References in the Fannie Mae Selling Guide.