One of our readers is looking to buy a house and his mortgage broker suggested that he open up about four credit cards to establish some credit history. Should he?
I’m hoping you can help me with this. I’m 25 years old and currently in the market to buy my first home. I have a steady job with a decent salary. I have a fair amount of cash saved up for a down payment, enough that I estimate my final top end price tag to be about $250,000 assuming a 20% down payment on a conventional 30-year mortgage.
The quandary I am in is that I have very little credit history beyond my primary bank’s Visa. I was raised to be very fiscally responsible and to not buy anything I could not immediately afford. My credit score is over 800 (I forget the exact value). I finished college without needing to take out any loans (in fact, I had money left over) and I’ve never had a need for more than the one credit card I mention. As a result, I have a distinct lack of lines of credit that would indicate or otherwise “prove” to lenders that I can handle a mortgage (an unfortunate side effect of the housing market crash).
As the housing market and interest rates have pretty much hit bargain basement levels, I’m hoping to find something before the market rebounds back to less-friendly levels (especially in the locations where I am looking to buy). A family friend was kind enough to offer her assistance as a real estate agent, and so far has been very helpful. She recommended/referred me to a loan officer/mortgage broker she has worked with in the past and trusts, in an effort to assist me on the pre-approval process. She also advised I try to get pre-approved through normal channels as well (i.e. talking to my primary bank, a credit union, other banks, etc.). However, when I went to my primary bank’s home loan department, they said I would only qualify for an FHA loan as I did not have sufficient credit history to warrant a conventional one. I have not yet had a chance to approach a credit union or other bank regarding this, it’s still on my ‘to-do’ list.
I have been working with this loan officer for about a month now, and he recently recommended to me that I open 4(!) more credit cards with various institutions (gas card, department store, other banks, etc.), put some small balance on each of them, then pay them off ASAP. He said it would take about a month for the new credit lines to appear on my credit report, at which point he would re-run his magical software and supposedly it would give me more and better options as far as my loan pre-approvals go.
My question is – is this true? Is that even a good idea? I think Consumerist has mentioned that opening new credit cards can actually lower your credit score. Friends and family who relate their own real estate experiences keep telling me that my large down payment should qualify me for a very good 30-year conventional loan even though I don’t have much credit history. But I understand the market is incredibly cautious nowadays, and I don’t know what dictates how loan terms are made, bent, broken, or otherwise enforced.
Any suggestions, advice, or additional thoughts would be most welcome for this wannabe-homeowner n00b.
Hey Dan, congrats on your house-hunt and fiscal responsibility.
UPDATE: A far better idea has been suggested by wiser readers, which is to ask the loan officer to “manually” underwrite the loan. This considers your credit worthiness without taking credit history into account. If your score is over 800 and you have the big downpayment, you shouldn’t have a problem qualifying. If he gives you static, find another guy.
Opening up four credit cards at once will harm your credit score in the immediate period, and since you’re looking to buy a house pronto, you’re better off not taking the hit.
While your frugal ways have given you a hefty nut as a down payment, which is most excellent and the hardest part of the home buying process, they have also left you without much in the way of credit history. Your loan officer is absolutely right, you do need to establish some of that history to help you qualify for a mortgage. Right now you’re a blank slate, and banks don’t like that.
Opening a few credit cards and making some quick purchases and paying them off is the right move here. You may experience a small temporary ding on your score as the creditors will have to do hard credit inquiries, but it will go away soon. Not having any credit history at all is going to hurt your credit worthiness a lot more in the long run that just opening up a few cards.
If you can then lock them away and not use them and go back to your saving up for stuff and paying for it cash system, which should be no problem for a disciplined fellow like you, you’re golden.