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Alternatives
Credit scoring is the new normal. Once an archaic, proprietary manual process a lender would use to help evaluate a borrower’s profile is now streamlined to the point where a credit decision can be issued in a matter of seconds.
Credit scores, the most popular ones follow the Fair Isaac, Corporation algorithm, are issued by the three main credit bureaus, TransUnion, Equifax and Experian. These bureaus contain credit histories of millions of consumers. Each time a consumer makes a payment on a credit card or on a mortgage it’s reported to the three bureaus. Businesses pay a subscription fee to these bureaus so they too can quickly assess a borrower’s credit worthiness by reviewing an applicant’s credit scores.
But what if there are no scores?
In the mortgage world, there is a term called alternative credit. Alternative credit is forms of credit whose payment histories are not reported to any bureau at all. And if a mortgage loan requires a certain score and there is no score, alternative credit may be the answer. What is alternative credit?
Alternative credit is made up of things like rent, day care utility bill payments. If you pay your rent on time each and every month to your landlord you’ve established a credit history although the credit bureaus won’t report it. Payments to the water company are another form of alternative credit that a lender can review. A lender can look at copies of cancelled checks made out to the water company and compare them to copies of the water statements over the previous 12 month period. Don’t have 12 months worth of statements? The water company will provide a payment history, establishing your credit worthiness.
In order for a lender to use alternative credit on some loan programs you’ll need to provide 12 documented 12 month history in three separate accounts. By doing so, you’ll have established your credit worthiness to your lender who can approve your loan without the need for a credit score.
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