Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
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Want a mortgage? Ditch cash-only, build a credit history
By Sally Herigstad
Dear To Her Credit,
My good friend is looking to buy a $69,900 house, but he doesn't have any credit. He pays all his bills and things with cash.
He's been working on a farm milking cows for about a year and has a steady check every month. But since he's just getting his life going, all of his phone bills, car bills and so on are still combined with his mother's bills. He does pay his half.
He's trying to get a mortgage plan, possibly with the help of FHA or Fannie Mae's program. He just needs some good tips or ideas on how to get everything approved. Any advice? -- Alexys
He's been working a steady job, he's not in debt and wants to buy a house. Sounds like he's doing pretty well!
Before he can get a home loan, however, he needs to ditch the cash-only lifestyle and build a credit history. Even government homebuyer programs, such as FHA loans, require homebuyers to demonstrate financial responsibility before they qualify for a mortgage. Here's how he can start building a good credit history:
- He needs some kind of credit. He doesn't need to go into debt; in fact, I hope he doesn't. He can open a couple of low-limit credit cards, make a few purchases of gas and groceries on them every month and pay them off before the due date. If he has trouble opening a regular credit card with no credit history, he may need to start with a secured card. This is a card that is secured by an account in which he would keep cash equal to the limit on the card. The bank's interest is secured by the cash account balance.
- Have him consider being added as an authorized user. By having his mother add him to one of her credit card accounts, his credit history gets the benefit of her account's good payment history. A couple of caveats: He shouldn't try this if there's any chance he could spend more than he can easily pay off every month. And make sure his mother's account has an excellent payment history or adding his name to it will do more harm than good.
- He needs to keep an eye on his credit report from now on. He can check his report once a year for free from AnnualCreditReport.com. If he sees any items that are incorrect, he should dispute them immediately. Note: If your friend has truly never had any kind of loan or credit, he may not have a credit report until he opens his own card account or has a loan.
- He can try to get a small loan from a local bank or credit union. Before getting a mortgage, he should start with a smaller loan to build a pattern of on-time payments that will reassure bigger lenders. Sometimes a local bank or credit union can help out by extending a small personal loan to your friend. By paying back the loan with regular, on-time payments, and with bank reporting those payments to the credit bureaus, a credit history is started.
You say he pays his bills with cash, but I hope he also has a bank or credit union account. Banks don't report normal checking account activity to the credit bureaus, so having a checking account doesn't directly affect a person's credit score. However, as he starts paying credit card bills and applying for a loan, he needs to be part of the banking system. He'll need other banking services as he gets ready to buy a house, such as getting a cashier's check for closing.
Building a new credit history is not complicated. After your friend takes a few steps to establish a good credit history, he can start packing. He's well on his way to buying a house he can call his very own.