Q: I was recently told I don’t have enough "open lines of credit" to qualify for my town’s down-payment-assistance program for first-time homebuyers. But I have three credit cards — one with a balance — and a school loan, which I pay on time. Isn’t that enough?
A: As a young child, my Dad taught me that she who has the money makes the rules. Whether that was an appropriate lesson for a young child notwithstanding, it certainly was an accurate one!
Mindset Management
As you’ve discovered, when you’re applying for any sort of home financing, you have to shift into the mindset reflected in the financing program’s guidelines. In the real world, most people would think that your credit lines — or trade lines, as they’re called in the mortgage industry — reflect a very responsible credit profile. Not too much debt, not overextended, two cards that are paid off and everything paid on time? Sounds fabulous, right?
Maybe not — in the mortgage universe. In home finance, the pertinent question is not "are you financially responsible and debt-free?" but "can you demonstrate that you actively, regularly and responsibly use credit?"
Need-to-Knows
Trade lines are what lenders use, in addition to your credit score, as documentation that you have credit, use it and use it responsibly. Traditionally, lenders required four lines of credit that had been open and active for 24 months as a minimum requirement to qualify for home mortgages.
Recently, though, many lenders are starting to see it the other way around. It seems to have dawned on the mortgage banking world that perhaps a consumer who has been responsible enough to largely avoid debt is an attractive mortgage borrower. What you are running into is common — city-run down-payment-assistance program (DAP) guidelines tend to evolve more slowly than mainstream mortgage programs. As a result, while many bank mortgage loans no longer have a trade line requirement, lots of DAPs still do. …CONTINUED
Fortunately, though, because their mission is to promote homeownership among people who might not be able to own a home without their help, DAPs tend to be extremely flexible on what sorts of accounts they will count toward your open, active and on-time trade line requirement. DAPs are often said to accept "nontraditional" trade lines; if you’ve been told that you don’t have enough lines, ask if the program will consider your rent, utilities, cell phone or insurance payment history to satisfy the trade line requirement.
And one more thing — some credit-card companies close inactive accounts after a fairly short period of time. I’ve had a number of clients like you who were surprised to find out that credit accounts they hadn’t used for six months had actually been closed. You might want to investigate whether those two cards with zero balances are still actually open accounts — ask for the copy of your credit report that was used by the DAP to declare your trade lines insufficient, and see if either of those accounts were closed without you being aware.
Action Plan
1. Review your credit report, to see if any of your accounts have been closed due to inactivity.
2. Ask your DAP representative if there are any nontraditional account types — like phone bills, insurance or rent payments — that will satisfy the guideline.
3. Once you know which nontraditional accounts will work for the DAP, gather the statements or obtain a verification letter of on-time payment and submit it to your DAP representative.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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