Alternative forms of credit are ways of verifying your bill payment history if your credit report does not provide enough examples to help the lender approve you for a loan. Not enough examples may be due to an insufficient amount of creditors who report on your credit. This may be caused by a variety of circumstances:
- You don’t have any credit cards (maybe you don’t like them or never applied for one)
- It’s been a long time since you purchased anything on an installment plan (monthly payments on a purchase for a specified length of time)
- The types of loans you have secured are from companies that do not report to agencies (cell phone companies, utilities, etc.)
To secure a loan for the purpose of buying a home, a lender needs to see at least 2 and preferably 3 trade lines. These are forms of loans with a credit reporting history on your credit report.
Following is a list of the normal trade line a lender looks for. They look at the payment history for the last 12 months.
- Credit cards
- Current home loan
- Student loan payment
- Furniture payments
If you do not have enough or any of these, they look at alternative forms of credit such as:
- Utility bills such as electric, gas and telephone
- Cell phones
- Gym memberships
- Used car loans through a dealership
The lender is trying to confirm a consistent and on-time bill paying history. The only loans that a lender can grant using alternative forms of credit are FHA, VA or USDA loans. Conventional loans do not accept this form of credit. The best way to see where you stand is to have your credit report evaluated. This lets you know what you need fix on your credit report so it doesn’t inhibit your ability to get a home loan.
If you need assistance with this, send me an email via [email protected]. I will be happy to answer any questions you may have.