Effect of mortgage payoff on credit score/building new

[MissMarty]

My hubbie and I have spent the last year working on our credit scores so that we could build our dream home on my family's land. We are finally there and have lender approval to contract with our builder. Builder will carry the construction loan. DH has the lower of the scores with a mid of 659 and there has been no reason to think that his scores wouldn't be over 720 by the time we lock in our rate 45 days before closing in Jan/feb 2014. But here's the "worry of the week", as DH has jokingly termed the thoughts that keep me awake lately. We sold our current home 3 days after listing and will close on it Aug 5. Awesome right? But won't his credit score take a dive after his mortgage and 2nd are paid off through the title company and his credit report is updated to reflect the lack of a mortgage? We went through UW without a hiccup to qualify once but will go through full UW again and were really counting on higher scores to get the lowest rate possible. Has anyone had any experience with this? Is there a way that our lender can compensate if this causes a drop in scores?
Thanks, in advance, for any help you might be able to send my way. This is my first post but i read nearly every post in this mortgage forum daily and devour every nibble of credit/financial wisdom I can. You all are awesome!

[pizzadude]

Your FICO scores shouldn't drop due to paying the mortgages.   They'll still count in your mix of credit and also in your Average age of accounts.

[MissMarty]

Thanks pizzadude... That's great to know! So even though they are closed accounts, the good mortgage history is still reflected in his scores, right? I thought I had read somewhere that the lack of an open mortgage can cause the scores to be lower but I'm relieved to think I was wrong!

[ChrisinKC]

Do a search on scores being lowered after paying off a mortgage or any loan.  You'll find TONS of people that it has happened to. In fact, there are many cases where the drop in score caused the borrower to pay a higher APR than what they were preapproved for, along with a higher PMI (rates for PMI are also determined by your score), and their home owner's insurance rates increased.

Here's one link in the search I performed - http://ficoforums.myfico.com/t5/General-Credit-Topics/Paid-off-mortgage-score-went-down/td-p/1800412

Another, even more interesting, link - http://www.fivecentnickel.com/2010/01/22/effect-of-paying-off-your-mortgage-on-your-fico-credit-scor...

My Trans Union credit report from myFico.com says "The reason consumers with good FICO scores get better interest rates is because they pose less risk of missing payments or defaulting on a loan".  This implies lower scores means there's a higher risk that a payment will be missed or a loan defaulted on.

Since credit scores are supposed to be a determinent of risk of missing a payment, I don't understand why credit scores are LOWERED once a debt is paid for, because there is NO payment required. How is it even possible to miss a payment on something that doesn't even require a payment?

If you've paid your mortgage for a long, extended period of time and have shown consistency in paying it on time, once you close your mortgage there should not be ANY negative impact to your score - however what SHOULD happen and what DOES happen are two completely different things. 

Financial institutions want to keep your score as low as possible so that they can charge you higher rates and increase their profit margins.  Is it fair to the consumer?  Absolutely not, but good luck with trying to get anything changed.  This ENTIRE system has been developed to work in the favor of the financial institutions and not a single entity (FTC, CFPB, Attorney General's Office, Congress, etc) will do a single thing to change it.

Good luck and I hope your score will increase after they artifically lower it after your mortgage has been paid for.

[pizzadude]

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@MissMarty wrote:
Thanks pizzadude... That's great to know! So even though they are closed accounts, the good mortgage history is still reflected in his scores, right? I thought I had read somewhere that the lack of an open mortgage can cause the scores to be lower but I'm relieved to think I was wrong!

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Yes, the closed accounts will still be factored into your scores, and they should hang around on your reports for ~10 years from the date closed.

You can certainly have a great FICO score even without a mortgage reporting ( open or closed ).

[MissMarty]

ChrisinKC... Thanks for the link and info. That seems so unfair. If this is the case, we would have been better off to list our current home maybe 2 months before completion of the new one and hope that it sold right away so that there was no lapse but the time was right to sell. Who would have thought that 6 months of renting in between homes could damage a person financially? Especially when we thought we were making a wise financial decision? Craziness... But thanks for the well wishes.

[ChrisinKC]

Yeah, it is unfair.  Completely contradictory to the name of the law that governs credit reporting - the (uh-hum) "Fair" Credit Reporting Act.

[frugalQ]

My DH and I refi'd our mortgage in oct '12...when the old mortgage showed as paid/close on our CR, both of our scores dropped about 11pts...on myfico EQ and TU. the reason listed was lack of open mortgage.

It took our mortgage co 5 months to report our new loan. Once it reported, our scores rebounded (even with the drop in AAoA)....reason was because of better credit mix.

I think lack of mortgage has a negative effect on CR....especially for those who previously had one.

[MissMarty]

So suppose at the time we go into final UW with a score of 719. We were pre-approved with DH'S mid of 659 when his cc utilization was at 31% on a combination of 4 cards, 2 of which he's an AU on (mine), (one balance was 0/750, my NFCU was at $34/$5000). So the 31% was made up of the combo of his 2 cards. We plan to have 1 of his paid off and the other report a balance of 8-9%... Seems to be the sweet spot. Assuming that the only differences on his CR are those cards balances and the lack of a mortgage, would our bank feel any inkling of compassion, knowing that the mortgage situation caused a drop, and give us the lower rate that a 720er would receive? (I'm sure that was a dumb question... I'm even LOLing at myself right now).
Goodness... Why is it that a system that has the ability to either save a person a small fortune or cost them a bundle wasn't designed more fairly? Now that I'm thinking about it, we chose to sell now because its a hot sellers market in our area and after 8 years of owning this home, DH will take home $90,000 at closing. But depending on a 3-digit number, that $90k could be eaten by our new interest rate pretty quickly.

[ChrisinKC]

MissMarty, you seem to be a very nice and composed person, which makes it all the more difficult to say this, but I wouldn't anticipate any bank to have any compassion for any reason - ever.

In order to get the rates as a 720er, the lowest mid score between you and your husband would need to be >= 720.

I would call FICO and ask them for ways to improve your score quickly. They told me to charge a few bucks, and it did help.

One thing to.consider though is that each time your lender runs your credit/score, your score drops. You can run it as often as your pocket book allows on myFico.com, but of course the numbers you'll get here will never match the numbers from your lender. It is a good (but costly) way to see how changes are effecting your credit.


Your plan to have some credit utilization shown is a good idea, and is better than having all balances of $0.00. My score recently went up 22 points over night because I went from $0.00 usage on ~$30k available credit to $49.0 usage. My score was 736 and went to 758.

Do you or your husband have any collections on your reports? If so, there's a possibility your score could increase if you were to do a "pay for deletion". I won't go into it unless you're interested.