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I'm thinking about buying my first house, and I'm wondering whether I should get a mortgage from a bank or not. This is mostly because I've heard that getting a mortgage is critical part of building up one's credit history. I guess the reasoning is that, because mortgages are so huge, they're somehow better than small credit card payments or other factors?

The alternative would be to borrow a lot of the money from family, who would charge not much interest and not be very demanding about repayment. Of course, that would cost less in the long run, but it also wouldn't build up any credit history.

So I have two related questions: how big is a mortgage's impact on credit history and credit rating, and specifically, is it big enough that I should get one? Or should I go with the borrowing from family plan? Or maybe half the money from one, half from the other?

Also, I don't know what happens when you try to sell a house before a mortgage is paid off. So, in case it matters, I'm planning to live in this house for four years, six tops, then sell it and move to another city.

Absolutely everything about the home buying process is still new to me, sorry if I left out any important detail, please tell me and I'll add it in.

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    Welcome! Where are you? We like to use country tags as your location in the world makes a difference in the answer. Also, since the question about selling before the house is paid off is really separate (as you noted), it would be best if you asked two different questions. Finally, are you more concerned about your credit standing or owning a home? Is money going to be an issue in your life? – MrChrister Mar 30 '14 at 21:16
  • Thanks, I added a country tag. I really only care about the selling part as far as it makes a difference to this question, so if you think it is not relevant I will just remove it. (And maybe ask a separate question later on if I need to.) For the purposes of this question I am concerned solely with the credit aspect. – First Time Buyer Mar 30 '14 at 21:20
  • "The alternative would be to borrow a lot of the money from family, who would charge not much interest and not be very demanding about repayment." Cheap money (less that the going rate for mortgages)? And maybe you don't even have to pay it all back? – Joe Strazzere Mar 30 '14 at 21:54
  • Cheap money, yes. Not paying it back... I'm not that lucky. But the question is really about credit ratings and whether a mortgage is special in any way for building credit. For the moment I am not interested in the (many) other aspects of home buying. Will edit to add another tag. – First Time Buyer Mar 30 '14 at 21:58
  • Man, I really phrased this poorly. I should have written it more like "How important is it to have a mortgage in your credit history?" I think that's too big of a change to make at this point, though. – First Time Buyer Apr 4 '14 at 1:09
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It may or may not be a good idea to borrow money from your family; there are many factors to consider here, not the least of which is what you would do if you got in serious financial trouble and couldn't make your scheduled payments on the loan. Would you arrange with them to sell the property ASAP? Or could they easily manage for a few months without your scheduled payments if it were necessary? A good rule of thumb that some people follow when lending to family is this: don't do it unless you're 100% OK with the possibility that they might not pay you back at all.

That said, your question was about credit scores specifically. Having a mortgage and making on-time payments would factor into your score, but not significantly more heavily than having revolving credit (eg a credit card) and making on time payments, or having a car loan or installment loan and making on time payments. I bought my house in 2011, and after years of paying the mortgage on time my credit score hasn't changed at all.

MyFico has a breakdown of factors affecting your credit score here: http://www.myfico.com/crediteducation/whatsinyourscore.aspx. The most significant are a history of on-time payments, low revolving credit utilization (carrying a $4900 balance on a card with a $5000 limit is bad, carrying a $10 balance on the same card is good), and overall length of your credit history. As to credit mix, they have this to say:

Types of credit in use Credit mix determines 10% of my FICO Score

The FICO® Score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It's not necessary to have one of each, and it's not a good idea to open credit accounts you don’t intend to use.

The credit mix usually won’t be a key factor in determining your FICO Score—but it will be more important if your credit report does not have a lot of other information on which to base a score. Have credit cards – but manage them responsibly

Having credit cards and installment loans with a good payment history will raise your FICO Score. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.

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I would go with the family route if I was you. And i think many other people would if they were fortunate to have such a great option.

This will allow you to move faster when your trying to buy a new house because you can easily get a mortage if you see a stellar deal. Also you can establish credit in much cheaper ways than paying the 4% or so on a mortgage. finance a car that you have the money to buy because the interest rates are much lower .9% and you build the credit while paying less interest. Or even better, try and make most of your purchases on a 0 fee credit card and every 6-8 months get a new credit card to have multiple lines of ongoing credit.

to use the mortage to establish credit isnt worth the 4% hit in wealth that it offers. now mind you if your options were to buy the house with your own money outright or get a mortgage i would say get the mortgage because the added leverage would help your investments beat the market most years . figure if you get 6% an average portfolio each year and you can write off the taxes on your mortgage you will be ahead by more than 2%

  • Wait, I don't know where you live that you can get a car loan for 0.9%. In my experience car loans have always carried higher rates than mortgages. I just bought a used car a few days ago and I am in the middle of refinancing my mortgage. Best mortgage rate I can find is 3.9%. Best car loan rate I can find is 4.4%. Mortgages are pretty much the lowest-interest rate loans a consumer can get. Okay, if you get a credit card and pay it off every month, that's effectively a one-month loan for 0%. But if you don't pay it off in the grace period, credit cards typically run 12 to 19%. – Jay Mar 31 '14 at 20:12
  • Auto loan rates can be below the prevailing mortgage rates. Penfed's current used auto loan rate is 2.49%, and most 30 year FRMs are probably currently going for about 4% or more. Still, for building credit specifically, better to get a credit card and make on-time and in-full payments monthly than to carry any kind of interest-bearing debt. – HigherAbstraction Apr 3 '14 at 21:34
  • @Jay - in many places in the US, you can get them for between 0% (depending on the manufacturer) and 7%. Mine right now is 2.09%. And my dad's was 0% til he had his last payment this month :) – warren Apr 4 '14 at 20:38
  • what warren said. ford will do it for most cars if its for 3 years or less. any interest free loan ill take. – Frank Visaggio Apr 5 '14 at 4:44
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This is mostly because I've heard that getting a mortgage is critical part of building up one's credit history.

I've had two mortgages funded by family members, and my credit score is Excellent. (It would have been more excellent if the mortgages had been commercial, but Excellent is Excellent nonetheless).

and not be very demanding about repayment.

Yeah, but they'd whisper among themselves about you and your poor ability to manage finances. And your marriage, spouse, kids, etc.

Paying my family every month was Priority Number One, even when everything else was collapsing around us.

protected by Community Jun 18 '14 at 22:21

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