Qualifying for a mortgage loan requires a good credit history. Banks want a proven record of responsible financial behavior and lines of credit answer this requirement. It’s not enough to use a mortgage loan calculator to figure your mortgage payment amount, you need to demonstrate that you can handle credit successfully.
What is a line of credit? A line of credit (aka credit line) is when a bank grants an unsecured loan amount. Unlike a regular loan, interest is only charged on how much of the credit line you use. For example, a department store credit card has a limit of $500. That’s your line of credit. You spend $50 which leaves $450 left on your line of credit to use. When the bill comes, if you pay it off in full, there’s no interest charged. If you don’t pay it in full, the amount you owe incurs a credit charge.
Harry Vanezis, Vice President and Senior Loan Officer at Bank of America, said that for mortgage loans, banks consider a car loan/lease and rent/mortgage payments as lines of credit too. Harry advises that you get a bank and department store card. “Charge your gas every other month on the bank card and use the other for gift purchases but pay off the bill in full when it arrives so you don’t incur interest expenses” said Harry. “If you do this and pay your other bills in full and on time, you’ll have an excellent credit history.” While 4 lines of credit are best, 3 will work if your other credentials are strong.
Amazing as it is, paying cash for everything makes getting a mortgage difficult because you have no verifiable record of good financial behavior. Prudent and regular use of lines of credit creates an excellent credit history.