How to Build Mortgage-Worthy Credit

With mortgage rates lingering at their historic lows, there is infinite possibility (and opportunity!) for first-time home buyers and previous homeowners to take advantage of great deals in Chicago real estate. But there are still a few details to straighten out on your end.

If you want a 30-year fixed mortgage at the national average of 3.32%, you really need to have stellar credit—something in the neighborhood of 720 or higher. Without it? Well, whether you fell into credit card debt in college, struggled to repay student loans, defaulted on a mortgage or simply never opened up any lines of credit, you’ll find yourself in the same position: on the sideline.

But do not despair! Whether you’re a young consumer trying to get started right or a grizzled veteran trying to recoup your credit score, there are simple pointers for getting started on the road to stellar credit.

1. Over time, open and maintain one to three credit accounts.

To qualify for the desired mortgage rate, you’ll have to open up lines of credit. Traditionally, people obtain simple credit lines by obtaining a department store credit card, bank credit card, gas card or auto loan. These are common starter credit accounts, and highly effective if used appropriately.

What if you’re in a tough credit situation and don’t qualify for any of the credit opportunities by yourself? There are still options! You can ask a parent to add you as an authorized user to one of their accounts or find a co-signer to open your own credit line. Alternately, you can get a secure credit card from you bank. This simply requires an upfront cash deposit, and then the bank gives you a credit card with a credit limit based on the amount of your initial deposit. These thoughtful strategies can help you qualify for one of the traditional lines of credit.

2. Once open, use your accounts wisely.

Now, don’t run out and open three lines of credit in the same week. A mass wave of credit applications will actually have a negative effect on your credit score, so pace yourself; apply for additional lines of credit a couple months after your last application. Once you have a new credit card, use it responsibly. While a zero balance does nothing to build credit, a revolving balance of about 30% of the credit limit is ideal. Oh, and always, always pay your bill on time.

3. There are alternative trade lines.

From this point forward, it’s time to contact a mortgage broker for assistance with your credit-building plans. There are alternative trade lines available if you apply for a FHA loan, and FHA loans are actually the most flexible regarding credit scores and required credit accounts. In some instances, they will accept rent, auto and health insurance, utilities, cable and cell phone and child care expenses as lines of credit; all you have to do is prove that the appropriate amount was paid and these payments were made on time.

Building your credit isn’t a swift process, but it’s achievable, and certainly worth doing if your sights are set on home ownership. Consider what other questions you have about your own credit as it relates to buying a home, and then contact your Chicago real estate agent or financial representative.

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