Housing History for Credit Challenged Borrowers
Housing History for Credit Challenged Borrowers
The borrower’s housing history—demonstrating timely payment of rent or mortgage obligations—is a critical component of the credit analysis, reflecting the borrower’s willingness to repay debt. Non-QM loans are designed for borrowers who do not fit conventional or government criteria due to alternative income documentation or possible credit issues such as late payments, bankruptcy, or foreclosure. Housing History for credit challenged borrowers is looked upon with more flexibility in the Non-QM Loans ecosystem.
General Housing History Requirements
For most non-DSCR (non-investor) transactions, a satisfactory history is required to determine eligibility:
A. Lookback Period and Currency
We generally require verification of a borrower’s satisfactory housing payment history covering the most recent 12 months. Some programs require a lookback period of 24 months for standard eligibility. All mortgage and rental payments must be current at the time of loan closing.
B. Documentation and Verification Methods
The housing history for the primary residence, and the subject property (if a refinance), must be documented. Acceptable forms of verification include:
- Credit Report: Mortgage history rated on the credit report is preferred.
- Institutional Verification: Verification of Mortgage (VOM) or Verification of Rent (VOR) completed by a financial institution or professional management company.
- Payment Records: Twelve months of canceled checks, bank debits (highlighted on statements), or bank transaction history. Carbon copies or handwritten rent receipts are typically not acceptable as bank records.
- Private Party VORs/VOMs: If the mortgage holder or landlord is an individual or private party, verification is usually permitted only on a case-by-case basis via exception and must be supported by 12 months of bank statements or canceled checks.
Housing Delinquency Standards
We set specific limitations on the number and severity of late housing payments permitted within the lookback period:
- Advantage Standard/Expanded: Requires 1x30x12 (maximum one 30-day late payment in the last 12 months) up to a maximum 80% LTV.
- Sharp Premium: Requires 1x30x12.
- CSharp Standard: Allows 2x30x12 and 1x60x24 (two 30-day late payments in 12 months, and one 60-day late payment in 24 months).
- Edge Elite: Requires 0x30x12 or 1x30x12, with the latter requiring an additional Loan-Level Price Adjustment (LLPA).
- Horizon Standard/Expanded: Permits a maximum delinquency of 1x30x12 per the matrix. However, up to 3x30x12 may be considered if the borrower has been 0x30 in the most recent six months and agrees to a 10% LTV reduction.
- Rolling Delinquency: Rolling delinquent payments (e.g., repeatedly paying late) are generally not considered a single event, but rather each contractual delinquency is counted individually for loan eligibility.
Housing History Following Major Credit Events
A “Housing Event” typically includes foreclosure, short sale (SS), deed in lieu (DIL), loan modification due to default, Notice of Default (NOD), or being 120+ days delinquent. Bankruptcy (Chapters 7, 11, and 13) is also generally considered a Housing Event.
When a borrower has a recent major credit event (i.e., less than the program’s maximum seasoning, often 4 years), Non-QM programs typically enforce stricter, cleaner housing payment history requirements for the period after the event:
- Clean History Requirement: If a Credit Event is seasoned less than 4 years, the borrower must demonstrate a 0x30x12 (no 30-day late payments in the most recent 12 months) history for Non-QM Edge programs.
- DSCR Programs: For investment DSCR (Debt Service Coverage Ratio) loans, housing history is generally required for the primary residence and the subject property. The Sharp DSCR and Horizon DSCR programs require 0x30x12 housing history.
- Prime Non-QM Series: Requires a 0x90x12 (no 90-day late payments in the last 12 months) mortgage payment history on all loans.
Special Scenarios and Incomplete History
A. Rent-Free Status
A borrower living rent-free can present challenges for underwriting, as there is no payment history to evaluate.
- Ineligibility: Some lenders find borrowers who have lived in a rent-free situation generally ineligible.
- Temporary Exemption: Living rent-free for a period of three months or less (e.g., after selling a residence and before purchasing a new one) is typically acceptable, provided the prior 12 months of housing history can be documented.
- Mitigation (Non-DSCR): For Non-DSCR transactions, if a borrower lives rent-free (and not with a spouse/partner who covers the mortgage), they must typically meet restrictions such as providing a rent-free letter, making a 10% minimum borrower contribution, and observing a maximum LTV of 80%.
- Spousal/Title-Only Ownership: If a borrower is living rent-free from a spouse (whose name is on the mortgage) or has title-only ownership, verification of the payment history must be provided via an institutional VOM or 12 months of bank records.
- DSCR Exception: For DSCR loans, a rent-free status is permissible if the borrower has an established address supported by a rent-free letter and is either purchasing the property in a different geographic area or is an experienced investor with existing Real Estate Owned (REOs).
B. Incomplete Housing History
Borrowers who cannot document a complete 12-month history (e.g., recently moved into their first rental) are subject to restrictions under the Horizon Non-DSCR programs, including a 10% minimum borrower contribution and a maximum 80% LTV.
C. First-Time Homebuyers (FTHB)
FTHB requirements are often strict regarding housing history even if they lack major derogatory events:
- Non-QM Connect: FTHB are required to document a 12-month rental history showing 0x30x12 (no 30-day lates in 12 months) within the three years prior to application. This history must be evidenced by canceled checks or an institutional VOR completed by a management company; private-party VORs are not acceptable.
- Payment Shock: FTHB in the Non-QM Connect program generally cannot have a payment shock exceeding 250% (i.e., the new housing payment cannot be 2.5 times greater than the current rental payment).
D. Forbearance and Deferral
Borrowers whose mortgages entered forbearance or deferral are subject to strict rules:
- Ineligibility: Borrowers still in forbearance are not eligible.
- Post-Forbearance: Once the forbearance plan is completed, the borrower must have made a specific number of timely payments:
- Purchase or Rate/Term Refinance: Requires at least two months of payments since completing the forbearance plan.
- Cash-Out Refinance: Requires at least six months of payments since completing the forbearance plan.
- Loan Modification: A loan modification due to default is treated as a derogatory housing event subject to seasoning requirements. Restructured mortgage loans that resulted in any type of partial forgiveness or principal curtailment are generally ineligible.
FAQ's
If a Credit Event is seasoned less than 4 years, the borrower must demonstrate a 0x30x12 housing payment history (no 30-day late payments in the most recent 12 months) for certain programs (like our Edge/DSCR).
Our Advantage program requires a history of 1x30x12 (maximum one 30-day late payment in the last 12 months) when seeking a maximum of 80% LTV.
The housing history must be verified via an institutional VOM or 12 months of bank records (statements, canceled checks, or bank debits) to satisfy the primary housing history requirement.
After completing the forbearance plan, the borrower must have made at least two months of timely payments for a Purchase or Rate-Term Refinance.
No, borrowers who are still in forbearance are not eligible for a new mortgage.
Borrowers who are living rent-free must provide a rent-free letter and generally must adhere to restrictions, including a 10% minimum borrower contribution and a maximum 80% LTV. Some programs deem borrowers living rent-free as ineligible.
For FTHB using alternative documentation programs (like Bank Statement), the payment shock cannot exceed 250% (i.e., the new payment cannot be 2.5 times the current rent).
No, carbon copies or handwritten rent receipts are not acceptable as bank records for documenting payment history.
Acceptable proof includes institutional Verification of Rent (VOR) or Verification of Mortgage (VOM), or 12 months of canceled checks/bank debits highlighted on bank statements.
Lenders generally require verification of the borrower’s satisfactory housing payment history covering the most recent 12 months.
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