Do You Need 3 Lines of Credit to Get a Mortgage?

Getting approved for a mortgage can seem like a daunting process, especially for first-time homebuyers One common question that comes up is whether you need 3 lines of credit to qualify for a mortgage. The short answer is – it depends. While having multiple trade lines (like credit cards or loans) can help build your credit profile, there are some cases where you may be able to qualify with fewer tradelines In this article, we’ll break down credit requirements for mortgages and explain when 3 lines of credit are needed.

What Are Trade Lines and Why Do They Matter?

A trade line refers to any account that gets reported to the credit bureaus and shows up on your credit report, Common trade lines include

• Credit cards
• Auto loans
• Mortgages
• Student loans
• Personal loans

Lenders view trade lines as evidence that you can manage different types of credit responsibly over time. The more established trade lines you have, the stronger your credit profile generally is. Key factors lenders consider are:

• Number of accounts – Having more trade lines shows you can juggle multiple credit obligations. 3-5 trade lines is ideal.

• Length of credit history – Older accounts demonstrate a longer track record of responsible credit use,

• Mix of credit types – A mix of installment loans (fixed payments like auto loans) and revolving accounts (variable payments like credit cards) is best.

• On-time payments – Zero late payments on all accounts is optimal.

• Low balances – Keeping account balances low relative to credit limits shows responsible use.

Why 3 Trade Lines are Recommended

Most conventional mortgage lenders like to see 3 open and active trade lines on your credit report to demonstrate you can handle different types of credit.

There are a few reasons why 3 trade lines have become the standard threshold:

• Proves creditworthiness – Having 3 accounts that you pay on time shows lenders you understand how to use credit responsibly.

• Demonstrates experience – Managing at least 3 credit obligations exhibits your ability to juggle repayment of multiple debts.

• Increases score – Generally, 3 trade lines will lift your credit score more than just 1 or 2, all else being equal. More trade lines can continue boosting your score up to 5 accounts.

• Meets automated underwriting requirements – Many lenders use automated underwriting systems like Fannie Mae’s Desktop Underwriter which require 3 trade lines to approve mortgages with the best terms.

While 3 open trade lines is a common requirement, some borrowers may be able to qualify with fewer tradelines depending on their overall credit profile.

When Can You Get a Mortgage With Less Than 3 Trade Lines?

There are some scenarios where borrowers can qualify for a mortgage with only 1 or 2 trade lines. Here are a few examples:

• Exceptionally high credit score – Borrowers with FICO scores over 760 may only need 1 or 2 trade lines if the rest of their credit profile is very strong.

• Large down payment – Putting down more than 20% as a down payment can sometimes compensate for fewer tradelines.

• VA or USDA loans – These home loan programs backed by government agencies have more flexible requirements.

• FHA loans – FHA allows “non-traditional” credit references like rent payments to supplement fewer tradelines.

• Portfolio lending – Smaller banks and credit unions that hold mortgages in their own portfolio can set their own trade line requirements.

However, meeting one of these exceptions is not guaranteed to get approved with limited tradelines. Underwriters still look at your entire credit profile holistically.

How to Get 3 Trade Lines if You Don’t Have Them

If you don’t yet have 3 established trade lines reporting to the credit bureaus, you still have options to build your credit profile:

• Apply for a new credit card – Having at least one open credit card account should be doable based on your credit and income. Make sure to keep the balance low and pay on time.

• Become an authorized user – You can piggyback off a spouse or family member’s credit history by getting added as an authorized user to their credit card.

• Open a credit builder loan – These loans are designed specifically to help establish credit history with small fixed payments reported to the bureaus.

• Use alternative data – Phone bill or utility payments can count towards your credit profile with FHA loans or other alternative lending options.

• Get a secured card – These cards require a cash deposit upfront and tend to be more easily approved for those with limited credit history.

The key is giving yourself enough time to establish the new accounts. It takes at least 6 months of activity for most new trade lines to positively impact your credit and FICO score.

Maintaining Credit Health With New Tradelines

As you work to open new trade lines, be sure to maintain healthy credit habits to ensure they boost your credit profile:

• Make all payments on time – Set up autopay if needed. Payment history is the most important scoring factor.

• Keep balances low – High utilization hurts your scores, so keep balances under 30% of credit limits.

• Monitor your credit – Review credit reports regularly and dispute any errors immediately.

• Don’t close old accounts – Preserve the age of existing credit history by keeping old cards open with occasional use.

• Limit credit inquiries – Each application causes a hard inquiry that can ding your scores temporarily. Only apply for what you need.

Building strong credit with 3 or more open trade lines takes diligence, but doing so will maximize your chances of mortgage approval with the best terms. Be patient and let your new accounts age, and maintain good financial habits. With time and discipline, you’ll be in great shape to qualify for the mortgage you need to buy your dream home.