You’ve Gotta Have Credit to Get Credit–Now More than Ever
In the past, applicants for refinances or property purchases who didn’t have an arsenal of credit cards, car loans, or mortgages were able to get approved for home loans anyway–the lack of trade lines on their credit reports just meant that a special credit report had to be created from rental histories, utility payments, and other debt considered non-traditional. But that is changing.
Three’s the Lucky Number
One of America’s largest lenders released new guidelines recently stating that mortgage applicants need at least three trade lines with at least twelve months of payments each, and one of them must have a twenty-four month history.
The problem with short or limited credit histories is that the “length of history” category accounts for fifteen percent of your score–so someone with a perfect but limited history could lose over 100 points in that category.
Sometimes Bigger IS Better
But wait, there’s more: the payment history part of your score, which is worth 35%, includes “number of accounts paid as agreed,” so having a small number of accounts won’t help you there–and the new credit category, which counts recently opened accounts against you, is worth 10% of your score as well. Someone with a thin file, as it’s referred to when underwriters get together for their wild parties, has very little chance of coming up with the very high credit scores needed to get approved for a home loan today.
Keep it Clean!
Updated guidelines state that if you want to buy or refinance a home with a conforming mortgage, you can’t have any 30-day late payments on your credit history in the last year. You can’t have any 60-day late payments in the most recent two years. If you use a traditional credit report, that means you have to have paid your car loans, home loans, student loans, and credit cards on time. But if you go the non-traditional route, you have to be perfect with everything–no waiting for the notice in the red envelope before paying your power bill. And bouncing a check can costs you more than a bank charge–in the wrong hands, that info can cost you your new home loan.
Bucking Tradition
FHA guidelines for non-traditional credit have not changed. And credit scoring requirements for FHA home loans still don’t officially exist, although many lenders impose them. So far, though, even lender-imposed unofficial FHA minimum credit scores have not gotten so high as to be unattainable for many borrowers.
