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I plan on buying a home about a year from now.

I'm 25, have never owned a home before, but I have a credit score that hovers around 780, so I've got that going for me. However, I do not plan on co-signing and my credit history will be 5 years long (and a few months) when I plan to buy.

Some friends of mine recently attempted to get a mortgage to buy a house, but were denied. I ask this question because my friend says they were told they'd have been approved if "I had a third line of credit at least a year old."

I have two open credit cards (which I pay off) and an auto loan, which make up my credit history. Is there anything significant about the number 3 such that I should be looking into a third credit card? Especially since I'm purchasing alone? Is it more about the total amount of credit available to me?

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    Having the third line of credit makes no difference. If anything, it could hurt you. In this case it won't since your credit is good and you have large recurring payments (auto loan). I used one credit card for 4 years, progressively upping the limit. I would spend 2-3x the credit limit each month but I would be constantly paying it down. My credit score only went up during that time. I had no trouble getting a decent mortgage with only one "credit line".
    – HK47
    Commented Mar 6, 2018 at 15:55
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    You seem to be in a good shape but one thing I would point out. That score of 780, is it the FICO score? FICO is what most people mean they talk about scores. But everbody has their scoring systems and they are all pushing it so you just want to be careful that it isn't some specific bureau's model. If it is FICO then 780 is a really good number.
    – Fixed Point
    Commented Mar 6, 2018 at 20:05
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    The three major bureaus tend to be roughly the same most of the time. So FICO scores calculated using your credit profiles from each of the same will probably be the same. One thing you should definitely do is you can make an account and check your credit on each of the three for free. You should review it and fix anything wrong or missing. They will only show you the report and NOT the score. They will want you to pay to see another bureau's report on their site, and to see the scores, FICO or otherwise.
    – Fixed Point
    Commented Mar 6, 2018 at 20:16
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    As for why your score is good, you have some credit which you have used responsibly. You have some history, not too long nor too short. So statistically you are very low risk to lenders and hence you have a high score. Yes, it can be as simple as that.
    – Fixed Point
    Commented Mar 6, 2018 at 20:18
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    Scores for younger creditholders are often inflated, and lenders will certainly contrast that score against the duration and use of the credit you have been extended.
    – David W
    Commented Mar 6, 2018 at 20:31

5 Answers 5

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In my opinion you don't need to do much if anything differently. Keep on top of your payments and your credit score will improve over time (but is already quite good). If your cards have relatively low limits and are therefore frequently utilized highly, then it could be worth asking for increased limits to help keep your utilization down. Beyond that I wouldn't open new accounts or worry too much about your score, just keep doing what you're doing.

The primary other factors in getting approved for a mortgage are income and debt-load. Your post home purchase debt to income ratio will have to be under a certain percentage (maximums vary by lender/loan type) but the lower the better. For many lenders this means credit card + car loan + mortgage payment should be no more than about 1/3 of your gross monthly income. When the time comes to purchase you can start making additional mid-cycle credit card payments if needed to drive down your debt to income ratio (captured in a snapshot when they run your credit report), but hopefully you aren't extending yourself far enough where that's an issue.

If you can pay off your car loan and save up a 20% down payment, that'd be ideal, but if you have a low interest rate car loan I would prioritize a 20% down payment to avoid PMI.

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...my friend says they were told they'd have been approved if "I had a third line of credit at least a year old."

This is called a "Tradeline Overlay". There are a normal set of rules that must be met for approval of all mortgages such as minimum credit score (typically 560-620 ish) and debt to income ratio (for example 45% or lower). Some lenders add an additional requirement on top of the normal rules (called an "overlay"), and one of the popular overlays is a minimum number of lines of credit (called "tradelines"). Apparently the lender your friend is working with has a minimum of 3 tradelines as an overlay. Your friend should just shop around and find a lender that doesn't have the overlay requirement (which I would guess the majority of lenders do not).

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    Thank you. This "rule" is what perplexed me most, because I was unsure of whether I would be approved after seeing friends who I perceived as probably better off being declined.
    – BooleanCheese
    Commented Mar 6, 2018 at 19:51
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    @BooleanCheese - right, that was obviously the crux of your question. ;) I wouldn't worry if I were you.
    – TTT
    Commented Mar 6, 2018 at 19:52
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Your credit score is only one of many factors that go into a mortgage underwriters decision on whether or not to lend you money for purchasing a property. The score is used to give them a rough idea of how well you have serviced your previous and ongoing debts. A high score indicates that you are dependable in terms of making your repayments on time and for at least the minimum amounts expected by the creditor each week/month/year/whatever.

What a credit score does not tell them about a potential customer is how much debt they are currently carrying (their credit report will disclose this) and their ability to take on further liabilities.

It is possible to have a great credit score but already be teetering on the (theoretical) threshold of what you are able to repay each month based on your current income. Alternatively, you may have plenty of income and ability to repay debt, but have a terrible credit score because of poor debt management skills - making payments late or for the wrong amount.

There aren't really very many types of credit. If you already have an installment loan and credit cards then I doubt this would be used as a reason to decline a mortgage application. The most likely reason an underwriter would decline an application is if the applicants debt-to-income ratio is considered too risky for their portfolio. Different lenders are willing to take on different amounts of risk (while not a universal rule, the interest rates they charge typically reflect their risk tolerance - a lender with higher interest rates can take on riskier customers, using the extra revenue produced from higher interest rates to offset losses incurred when a higher proportion of of their portfolio defaults on payments).

All lenders will consider your total current debt, plus the amount you're asking to borrow, then compare that against your income (and to some extent your liquid assets). If you currently make $4,000 a month, have $600 in monthly loan and credit card repayments, and are asking for a mortgage that would require a $1200 monthly payment, then your debt-to-income ratio is (600 + 1200) / (4,000) = 45%. Some underwriters might be ok with this and approve the loan, others might want to see a lower percentage, say 43% or less.

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With a 780 credit score you only need to worry about two things: income and down payment. Its likely that your friends had credit trouble.

If I were you I would pay off the car loan, save an emergency fund, and then save a down payment. That is a lot, can you do that in a year? How much can you have for a down payment by then?

Provided that you do not attempt to buy too much house, then you will be easily approved even if your score drops in the 730 range, and it will likely increase once you pay off your car.

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    Why should they extend their timeline by 4 years?
    – Hart CO
    Commented Mar 6, 2018 at 15:28
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    @TTT my credit score skyrocketed after paying off all debt.
    – Pete B.
    Commented Mar 6, 2018 at 19:17
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    @HartCO whoops, misread the timeline, ty.
    – Pete B.
    Commented Mar 6, 2018 at 19:19
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    @PeteB. - your credit history is very different than OP's though. My credit score skyrocketed when I simply moved revolving debt into a term loan. But did not change much when I paid off the term loan. When you lose the revolving debt the utilization percentage is what has the biggest effect. I suspect you paid off some CC/LOC debt as part of that? In OP's position, losing the auto loan will not affect UP, but will reduce the "credit mix" which is why I believe the score could slightly decline.
    – TTT
    Commented Mar 6, 2018 at 19:19
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    @TTT: No. The last debt paid off was the house. My credit score increased slightly as I paid off debt, but sky rocketed after paying off the house. Moot point since I don't use credit anymore.
    – Pete B.
    Commented Mar 6, 2018 at 19:21
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In my 2016 first-time buying experience:

Credit score only affected the interest rate but me and my co-signer (brother) were both north of 700. Max Loan amount was determined by how much me and my co-signer (brother) made in the last two years minus re-occuring monthly bills (like car payment). Credit report was clean except for a single negative item (a phone bill I had disputed).

I purchased my home with zero-down required (I put some down).

Earlier in the year I was declined from a different lender for a cheaper home. The only difference was the lender.

Another random note, my eventual lender could not approve me for a loan until I removed the dispute on my credit. Their exact words we're "you cannot have a disputed credit item, negative is OK, but you have to cancel your dispute for us to approve the loan".

You asked multiple questions in your question but the answers are really all the same.

  1. Find a mortgage officer that you like and is cooperative and responsive.
  2. Tell them you are seeking pre-approval and want to see how much house you can afford. They can screen your income and your monthly debts/payments without looking at your credit and tell you if there exists items that need to be corrected.
  3. Have atleast a 10% downpayment ready so you can get a loan without PMI (I still don't know how I got out of pmi with 0% down loan). NOTE: PMI is completely up to the lender so if a lender wants 20% down to avoid PMI, find a new lender.
  4. While you can often get the seller to pay closing costs, have additional monies prepared for that as it may be the difference between you getting the house you want and you not getting it.
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