Paying your Netflix bill on time doesn’t just guarantee you instant access to “Breaking Bad” reruns. It could also help you get a mortgage.
Ideally, prospective homebuyers have a miles-long credit report that leaves little doubt about their ability and willingness to repay debt. That’s clearly not always the reality on the ground, a fact not lost on mortgage lenders.
Consumers with a positive but thin credit profile may still be able to secure financing. Success may hinge on what kind of nontraditional credit you can show to support your creditworthiness, be it a P.O. box, a book club membership or even a Netflix account.
That’s one more reason why it’s important to stay on top of all your recurring accounts, even if they don’t ultimately report to the major credit bureaus.
What Lenders Look For
Credit requirements will vary by loan type and lender. For example, right now VA lenders are generally looking for a credit score of at least 620. Conventional loans are more likely to require a score in the neighborhood of 740.
In addition to the scores, lenders also want to see a certain number of “trade lines,” which is how mortgage folks refer to credit accounts. Do you have a car loan? That’s a trade line. How about a credit card? Boom, another trade line.
These accounts reflect in part your reliability and your potential as a credit risk. A strong credit profile typically includes old trade lines that are still active and both installment accounts (student loans or a mortgage) and revolving accounts like credit cards.
When you’re ready to try and prequalify for a home loan, lenders will need to conduct a hard inquiry. They’ll be looking for a minimum credit score, often using the middle of the three bureau scores. They’ll also want to see a certain number of trade lines (three is a fairly common number), typically with at least a 12-month history.
If you don’t know where your credit currently stands, you should check your credit score using the free Credit Report Card, which grades you on each of the five major factors lenders will examine. You should also pull a copy of your full credit report (you can do this for free) so you can spot any potential negative accounts that might keep you from getting a home loan.
How to Support Your Score
So what happens if you come up short on credit accounts? This is where those nontraditional trade lines can be difference makers.
A lender’s underwriting team may be able to offset the trade line shortage with additional, positive information about your financial responsibility. In addition to the accounts mentioned above, potential alternative trade lines may include:
- A storage unit
- Cable or cellphone bill
- Auto or renters insurance
- Utilities paid separate from monthly rent
- Military members may be able to use any allotments that appear on their Leave and Earnings Statement (LES)
Know that not all of trade lines are created equal. The amount of the payment and its regular timing are the two most critical aspects. Rent, utilities and a cell phone bill are likely to carry more weight than others.
Expect additional requirements to pop up, too, such as verifying rent payments during the past 12 months.
Not all lenders will accept alternative credit accounts, especially in the wake of the subprime mortgage meltdown. You’re more likely to find them when seeking a government-backed mortgage, such as an FHA or VA loan.
But know they’re a potential option if your credit profile needs some work.