Buying your first home can seem overwhelming, but take a deep breath; we’re here to help you. Knowing the steps and specifications for your first mortgage will help you prepare and identify any surprises up front, sparing you from needless hassles later on. All sounds good, don’t they? Let’s review the most typical requirements for buying a property as well as potential pitfalls to ensure you have the best possible experience.
Navigating the world of mortgages can be confusing, especially for first-time homebuyers. One frequently asked question is, “Do I need three lines of credit to get a mortgage?” The answer is a little complicated, so let’s examine what you need to know in more detail.
Understanding Credit Scores and Credit Reports
Before we tackle the 3-line-of-credit question, let’s first understand the role of credit scores and reports in the mortgage process.
Your credit score is a numerical representation of your creditworthiness based on your credit history. It’s like a financial report card reflecting your ability to manage debt responsibly. Lenders use your credit score to assess the risk of lending you money.
Your credit report on the other hand, provides a detailed breakdown of your credit history. It includes information about your open accounts, payment history, credit utilization, and inquiries. Lenders use this information to verify your credit score and gain a deeper understanding of your financial behavior.
Now, let’s address the 3-line-of-credit question.
Do You Need 3 Lines of Credit to Get a Mortgage?
The short answer is no, you don’t necessarily need 3 lines of credit to get a mortgage. However, having multiple active credit accounts can positively impact your credit score and make you a more attractive borrower in the eyes of lenders.
Here’s why having multiple lines of credit can be beneficial:
- Demonstrates responsible credit management: Having multiple accounts shows lenders that you can handle different types of credit responsibly.
- Increases credit utilization ratio: Your credit utilization ratio is the percentage of your available credit that you’re using. Having multiple lines of credit increases your total available credit, which can lower your utilization ratio and improve your credit score.
- Diversifies your credit mix: A healthy credit mix includes various credit accounts, such as credit cards, installment loans, and lines of credit. Having a diverse mix shows lenders that you can manage different types of credit responsibly.
It’s crucial to understand that opening several credit lines won’t raise your credit score on its own. You must use these accounts sensibly by paying your bills on time and maintaining a low credit utilization rate.
Other Factors that Influence Mortgage Approval
Although having several credit lines might be advantageous, lenders take other factors into account before approving a mortgage. Other important factors include:
- Credit score: Your credit score is a crucial factor in determining your mortgage interest rate and eligibility. Generally, a higher credit score translates to a lower interest rate and better loan terms.
- Debt-to-income ratio (DTI): Your DTI measures how much of your income goes towards debt payments. Lenders typically prefer a DTI of 43% or lower.
- Down payment: The amount of down payment you can make affects your loan-to-value ratio (LTV), which influences your interest rate and loan options.
- Employment history: Lenders want to see a stable employment history to ensure you can consistently make mortgage payments.
- Property type: The type of property you’re buying can also influence mortgage eligibility and interest rates.
Tips for Building Your Credit for a Mortgage
In case you intend to purchase a house in the future, consider the following advice for enhancing your creditworthiness:
- Check your credit reports regularly: Ensure there are no errors or inaccuracies that could be negatively impacting your score.
- Pay your bills on time: This is the most crucial factor in building good credit.
- Keep your credit utilization low: Aim to use less than 30% of your available credit.
- Open a mix of credit accounts: Having a diverse credit mix can improve your score.
- Become an authorized user on a responsible credit card: This can help you build credit history without directly opening a new account.
Remember, building good credit takes time and consistent effort. You’ll be well on your way to obtaining a favorable mortgage for your ideal home if you heed these advice and appropriately manage your credit.
While having 3 lines of credit isn’t a strict requirement for a mortgage, it can be beneficial for improving your credit score and making you a more attractive borrower. However, it’s crucial to use these accounts responsibly and focus on building a strong overall credit profile. By understanding the factors that influence mortgage approval and taking steps to improve your creditworthiness, you’ll be in a better position to achieve your homeownership goals.
I have no tradelines; how do I start building my credit profile?
If you have no tradelines, that means you won’t have a credit score.
The minimum requirements for a credit score are:
- One account opened for at least 6 months
- Account history within the last 6 months
- Cannot be marked deceased on your credit report
Banks are less likely to approve you for a credit card or they might give you a low credit limit if you don’t have a credit score.
One of the easiest ways to start building your credit is with a credit card. CapitalOne has been known to provide credit cards for people without credit scores. The other option is a secured credit card, which works like a debit card. You pre-pay the card with anywhere from $200-500. As you spend, it deducts from your initial balance. The difference is, it is reported to the credit bureau.
Once you have a credit score, you shouldn’t have a problem getting a normal credit card. Again, you’ll want to have 3 open and active tradelines when applying for a mortgage.
An underwriter looks at your credit scores and profiles to see that you have a history of on-time payments, but they also need to know that you will continue to make enough money each month to pay off your loans. The underwriters figure this out by performing a calculation called a debt to income ratio (DTI).
Underwriting has slightly different definitions based on the industry you’re referring to. In the real estate industry, underwriting is part of the mortgage process. In it, a loan application is assessed by an underwriter, who is typically an impartial third party unrelated to the transaction, to ascertain the level of risk a lender is willing to accept.
The underwriting process is essentially in-depth fact-checking; underwriters take multiple things into account before reaching a conclusion, including:
- The buyer’s credit score
- The buyer’s debt-to-income ratio
- Pay stubs attesting to consistent income (this can be difficult in the case of commission-based income)
- Bank statements showing your current assets
- Tax returns and W-2
Depending on how quickly you gather your records, how many forms you need to submit, and how busy the underwriter is, the underwriting process can take two days to two weeks. Since underwriting typically occurs just before a sale closes, be sure to account for the waiting period and discuss your planning options with your Accunet mortgage professional.
You can make purchases during underwriting, but avoid any purchases that might affect your credit.
The reason for this is that your lender will “refresh” the balances on your credit tradelines at the conclusion of the underwriting process. Your lender will use the updated figures to recalculate your debt to income ratio if any have changed since the process started.
In the event that your ratio is at the upper end of the permitted DTI range, a fresh debt payment could raise it above the maximum DTI ceiling (43%). If you’re nearing the limit, DEFINITELY wait to put large purchases on credit until after closing. We will need to adjust our DTI calculation in light of the fact that the soft credit check that is completed at the end of the process returns your debts and their updated payments but does not provide your scores.
In general, the DTI formula is:
To calculate DTI, two numbers are used: Your “back end ratio,” and your “front end ratio.”
Back End Ratio: Total Monthly Debt Payments / Total Monthly Income = DTI
Front End Ratio: (Principal and Interest + Taxes + Homeowners Insurance) / Total Gross Monthly Income.
We understand that this may seem daunting, but you shouldn’t worry too much about it unless you want to check your own deduction This is the crucial component: your back-end ratio needs to be less than 463 percent (45% on an exceptional basis) of your gross income. Your back-end ratio must be below 35% of your gross income. (The FHA has slightly different rules to accommodate extreme circumstances. ).
Types of monthly debt can include:
- Credit cards: Minimum required payment for each card, added together
- Car loan/Lease payment: Your monthly payment
- Student loans: the lower amount of your student loan balance * 1% So a $100,000 loan will have a $100 payment. OR the actual payment that will fully amortize the loan. One of our loan consultants can walk you through that calculation.
- Child support or alimony payment
When you work for a W-2 employer, employment is simple; however, if you operate a business or are self-employed, things become considerably more complicated. If you’re a W-2 employee, you’ll need to provide pay stubs showing 30 days of payment. 30 days of employment will do if you recently changed jobs and your new position is in the same industry. You might need to work for your current employer for at least six months if you’ve changed industries, but frequently we can make an exception.
Self-employment and owning your own business make it difficult to prove income, increasing the difficulty in qualifying.
Let’s look at an example: You started your consulting business 1 year ago, and you’re doing great. You earned $50,000 last year, and you’re projecting to earn $75,000 next year. Unfortunately, due to the length of self-employment (1 year), underwriters will not count this income. Self-employed borrowers need to show 2 years of income. An underwriter of a traditional mortgage company will not be able to count your business income as a source of income until you show two full years of revenue, assuming you have no other source of income.
Let’s look at another example: In year 1 of your business, you earned a profit of $25,000. In year 2, you earned a profit of $50,000. First, even though the increase was positive, you’ll also need to give an explanation because your income fluctuated over the course of the previous year. Lenders like stability and predictability. The average of the two years, not the most recent year, will be used by underwriters to calculate your debt to income ratio. That means your gross yearly income for DTI calculation is $37,500.
Similar to self-employment income, part-time income is only eligible for accounting after two years of continuous employment.
Conventional loans require as little as 3% down, while FHA loans require a minimum down payment of 3. 5%. Nevertheless, we can provide you with a 20% down payment option through WHEDA (Wisconsin Housing and Economic Development Authority) if you meet certain requirements.
How much money do I really need for a down payment?
When purchasing their first home, a lot of people believe they must put down 20% of the total amount in order to get the deal approved, but that is untrue. That being said, paying less money up front isn’t always the best idea. Homebuyers can put down any amount between 3% and 20% of the total.
Let’s take an example. Suppose you write an offer for $200,000 on a house and intend to put down 3% of it. You’ll need to come up with $6,000 for your down payment, but that’s not all. In addition, we have to account for any closing costs related to getting your mortgage, property taxes, recording fees, interim interest, and other factors. So, depending on your other loan costs, you could end up paying way more than you intended to.
Making a down payment has tons of moving parts, so it can get confusing, fast. These are some examples of a 3% down payment transaction and how they can differ depending only on other expenses:
Those three examples all show a $6,000 down payment, but the amount needed at closing varies because of various loan costs. In column 1, the total amount of money needed to purchase the home is $10,180, and $9,330 is needed at closing. In column 2, the total amount of money needed to purchase the home is $9,012, and $8,162 is the amount needed at closing. Both those options require quite a bit more than $6,000.
You have two choices if you can afford your down payment but still need additional funds to finish the deal: using a seller credit or a gift.
What NOT to tell your LENDER when applying for a MORTGAGE LOAN
FAQ
How many lines of credit do you need for mortgage?
Do you need all 3 credit scores to buy a house?
How much credit line do you need to buy a house?
Can you have 2 lines of credit?
Can you borrow from a home equity line of credit?
You can draw from a home equity line of credit and repay all or some of it monthly, somewhat like a credit card. Unlike a credit card, however, HELOCs are not intended for minor expenses. When you’re shopping around for a loan, borrowing from the equity in your home will often get you the best rate.
What are home equity loans & lines of credit?
Home equity loans and lines of credit are secured against the value of your home equity, so lenders may be willing to offer rates that are lower than they do for most other types of personal loans. A home equity loan comes as a lump sum of cash, often with a fixed interest rate.
Do all home loans require the same credit score?
Since not all loans require the same credit score, here are a few different types of home loans and the credit score requirements for each. Conventional. For fixed-rate loans, you should have at least a 620 credit score to qualify for a conventional loan. For adjustable-rate mortgages (ARM), you’ll need at least a 640.
What credit score do you need to get a mortgage?
Conventional. For fixed-rate loans, you should have at least a 620 credit score to qualify for a conventional loan. For adjustable-rate mortgages (ARM), you’ll need at least a 640. Federal Housing Administration (FHA). If you have at least a 10% down payment, you can get an FHA loan if your credit score is less than 580.