One of the advantages of a strong economy is the opportunity for a new college graduate to land a professional job. And with a decent “real job” salary comes the desire to purchase a home rather than rent.
A challenge that new graduates may face, however, is the lack of established credit to qualify for a mortgage loan.
Lenders have some very specific requirements when it comes to mortgages. They are looking for an established credit history – at least two or three credit lines established for about two years – and on-time payments. This history and payment record will help establish a good credit score, which is an essential part of loan qualification.
For a young professional, credit lines might include closed-end credit, like a car loan or student loan, or revolving credit, like a credit card. It is important with revolving debt that you keep your balance at 50 percent or less of the credit limit. Ideally, you want to use the credit card at least once every three months for a purchase and then pay it off in full. This ensures that the credit line continues reporting to the credit bureau and may enhance your credit score.
But what if you’re a young professional without any established credit? A good way to begin establishing a credit history is to apply for a credit card with a small balance and use it as outlined above. Some individuals may find they need to open a secure card, where they deposit an amount – say $500 – and then use their credit card to draw against that reserve. This allows the user to prove they can handle credit responsibly and make timely payments. Lenders are not looking for large credit lines, but rather, a good history of use and payment.
An important consideration when establishing credit is the borrower’s own credit history – and not as an authorized user on someone else’s credit card. For example, if your parents add you as an authorized user on their credit card, it might be convenient when you are in college. However, you are personally building NO credit that will help you qualify for a mortgage. Further, when you are ready to apply for a mortgage, you will need to be removed from this account so the lender can accurately run your credit score.
Being a co-signer on an account, however, is not the same as an authorized user. If your parents, for example, co-sign a car loan or other closed-end credit account, it helps to build the credit of both responsible parties.
So what if you’re close – for example, you haven’t had credit for a full two years, or maybe only have two accounts? A lender may consider your application if you can show at least 12 months of on-time payments on a cell phone contract or rent, to strengthen your credit profile.
Homeownership is a viable goal for young professionals. Take steps now to establish good credit and you’ll be well on your way when it’s time to buy your first home.
Lisa Green (Vice President of Loan Origination)
Allen Tate Mortgage NMLS# 79543
Loans available in NC/SC