I came across an interesting article this week about the downside of debt-free living, an increasingly popular trend among the millennial generation. As I mentioned before, millennials have seen how the recession has impacted their families, friends and communities. Therefore, they are reluctant to open new credit and take on other debt.
Here is the problem with a debt-free lifestyle: when applying for a loan, lenders need to see the homebuyer has a solid history of paying off debt. That’s why in addition to a borrower’s credit score, we also look at the account types, balances, how long people hold onto accounts and other factors.
For example: VHDA requires a minimum of two credit tradelines (ex: credit card, loan) with 12 months of recent activity. You simply need credit history to obtain a home loan. Period.
For your clients: tell them it’s OK to carry debt but not to the degree that it can hurt your chances at qualifying for a loan. The rule of thumb is to keep your credit balances at 1/3 of your limit or lower. And ALWAYS make your credit payment on time.