While the actual credit score has a big impact on a loan approval, it’s not the only component of the credit scenario that underwriters consider for a mortgage approval.
Since loan programs, individual lenders and mortgage insurance companies all have their own credit report restrictions, it’s difficult to define a standard Rule-of-Thumb to follow.
However, the number of “Open and Active Trade Lines” seems to be the common denominator in most approvals.
A trade line is basically a credit card, installment loan or other credit liability that is reported to the credit bureaus and displayed on a credit report.
Credit Trade Line / Approval Bullets:
- Banks usually won’t count a trade line that is less than 12 months old.
- The minimum number of trade lines most lenders find acceptable is 4 open and active trade lines.
- Lenders like to see at least one credit line of $5,000, or all credit lines to total $1,000 or more.
Exceptions to Trade Line Rules:
Interestingly enough, a recent list of Mortgage Insurance requirements included a favorable trade line requirement, which read:
Min 3 trade lines @ 12 mo reporting. Cannot be ‘authorized user’
Basically, this means as long as the lender, and the loan program allow for less than 4 trade lines, this mortgage insurance company will accept only 3 trade lines that are in the borrower’s name.
Another exception to this rule is if you have no FICO score, and no negative trade lines.
In this case you may qualify for an “alternative credit” loan. The most common loan of this type is insured by FHA, but there are select programs that are usually targeted to assist people whose culture does not trust or use banks.
Borrowers applying for a non-traditional credit loan will still need to prove they have successfully paid their bills on time for 12 months by clearly documenting at least four creditors. A verification of rent from a property management company, power, utilities, cell phone… are alternative sources of credit that can be used.
*A letter from a landlord or creditor stating that the bills were paid on time is not acceptable forms of proof. Lenders will need canceled checks and / or copies of bank statements to start out with.
Since not all companies report to credit bureaus, it’s possible to get a complimentary credit report at AnnualCreditReport.com to verify your total reported trade lines.
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FAQs
Credit scoring formulas don't punish you for having too many credit accounts, but you can have too few. Credit bureaus suggest that five or more accounts — which can be a mix of cards and loans — is a reasonable number to build toward over time.
How many tradelines should you have? ›
There is no perfect number of tradelines, but if your goal is to build business credit, you will probably want to make sure your business credit report lists at least two to three accounts reporting to business credit bureaus.
How many lines of credit do you need to get a mortgage? ›
Having a good credit score is incredibly important — but so is the way you built it. A rough rule of thumb: You will need 3 open tradelines to qualify for a conventional loan.
What are the 5 C's of underwriting? ›
The Underwriting Process of a Loan Application
One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).
How many hard inquiries are too many? ›
Since hard inquiries affect your credit score and what is found may even affect approval, you might be wondering: How many inquiries is too many? The answer differs from lender to lender, but most consider six total inquiries on a report at one time to be too many to gain approval for an additional credit card or loan.
Can you have too many open lines of credit? ›
Having too many open credit lines, even if you're not using them, can hurt your credit score by making you look more risky to lenders. Having multiple active accounts also makes it more challenging to control spending and keep track of payment due dates.
Does adding tradelines increase credit score? ›
One of the central benefits of adding positive tradelines is the potential for an improved credit score. If the tradeline reflects timely payments and responsible credit usage, it can boost your score over time. A higher credit score opens doors to better interest rates, loan approvals, and credit offers.
Does buying a tradeline increase credit score? ›
Builds Credit History
Adding a new tradeline to your credit reports — especially a credit card one with an established payment history and low balances — may provide a strong credit reference to help move your credit score out of the thin file category.
Is it worth getting tradelines for credit? ›
There is no law against buying tradelines to improve your credit. However, buying tradelines may be viewed as deceptive by lenders and credit reporting agencies and could even put you in danger of committing bank fraud.
What credit score do you need for a $250000 mortgage? ›
To qualify for a conventional loan, you'll need a credit score of at least 620, though some lenders may choose to approve conventional mortgage applications only for borrowers with credit scores of 680 and up.
Some types of mortgages have specific minimum credit score requirements. A conventional loan requires a credit score of at least 620, but it's ideal to have a score of 740 or above, which could allow you to make a lower down payment, get a more attractive interest rate and save on private mortgage insurance.
Is it bad to have a lot of credit cards with zero balance? ›
However, multiple accounts may be difficult to track, resulting in missed payments that lower your credit score. You must decide what you can manage and what will make you appear most desirable. Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it.
How many lines of credit is OK? ›
Just as there's no fixed rule about how many lines of credit are ideal, there's no rule about how many lines of credit are too many for one person to have. It all depends on your situation. If you're confident that you'll be able to make the payments, opening one or more may be a good idea.
Does opening more lines of credit affect credit score? ›
How new credit can increase FICO Scores. If the new line of credit helps diversify the types of accounts you currently have, this can increase the "credit mix" factor of your credit score. It shows lenders you can obtain and manage different kinds of credit, which can lower their risk of lending you money.
Is it better to have multiple credit lines? ›
A new line of credit may improve your credit score. However, you should never take out an additional line of credit unless necessary. Applying for multiple lines of credit in a short period is not advised, and having too many lines of credit make you look risky to lenders.
Is it a good idea to have an open line of credit? ›
There are a few benefits that come with opening lines of credit—from helping you refinance your mortgage to improving your credit utilization ratio. However, it may not be necessarily what you need financially. For example, you may be in need of a loan that you can have more time to pay off.
While the actual credit score has a big impact on a loan approval, it’s not the only component of the credit scenario that underwriters consider for a mortgage approval.