Sold house, what to pay off before next mortgage...

[PineCat]

What to pay with closing proceeds? I have three credit cards all at 90% utilization that we used for renovations, these will be paid, but I am not sure whether I should also pay off the auto loan ($600/mo. payment) and installment loan ($400/mo. payment) - if it's not going to make a difference I'd rather stick the cash in savings for now.

[StartingOver10]

Do you have a lender you are working with for a new mortgage?  If so, have a good conversation with your LO on your current ratios and what you need to do to meet the loan guidelines for the next purchase.  

Has that LO calculated your DTI ratios for your new mortgage?

How much cash do you need to retain for your next purchase?  The loan program will be a factor + the property you decide to purchase. 

We can't really give you guidence without more info. Your current income and your new purchase price and loan program type will determine if you need to pay off a vehicle or not. 

Paying the revolving debt down will be very helpful for your score. The installment debt and the vehicle loan may (or may not) impact your current DTI.  Most of the time it is good to have as much cash in the bank as possible before going for your new approval. 

[PineCat]

We don't have a LO yet, we're moving from TX to FL so I need to do a little research there first. With those two loans, I think our DTI will still be low enough - I'm just wondering what paying off those loans will do to my score. We have plenty of cash even if we pay those loans off.

[StartingOver10]

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@PineCat wrote:

We don't have a LO yet, we're moving from TX to FL so I need to do a little research there first. With those two loans, I think our DTI will still be low enough - I'm just wondering what paying off those loans will do to my score. We have plenty of cash even if we pay those loans off.

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I will pm you an excellent LO here in Florida that can help you with those answers.

[StartingOver10]

A cautionary word:   don't pay off the vehicle loans yet.  I took a significant score hit (more than 60 points across all 3 CRA's) when I paid off my only open installment loan. 

Paying off revolving is fine with all at zero but one at a very small amount (between 1% to 9% of the individual credit card limit). You don't have to carry a balance at all, but let one card report a tiny balance each month. 

[Anonymous]

Great reply from StartingOver, as always.  Key takeaways:

(1)  Do not pay off any installment loans.

(2)  Because you have plenty of cash, do by all means pay off your entire CC debt.  Then continue to keep using one card, pay it in full every month, and keep the balance it reports positive but reasonably small.  Could be anywhere from $5 to 9% of the card's credit limit.

#2 will help your score a lot.

#1 is more nuanced.  If you still have plenty of cash (at least 20% of your next property) then there may be a case for paying one or both loans down a little bit.  You'd do that in the following situation:

(a)  Your CC balances have been reporting at the new very low levels for a couple months.

(b) You have just pulled your mortgage scores.

(c)  You can see that, if the EX score were 20 points higher, it would improve what your middle mortgage score is enough so that it would make a difference on the loan.. Example: EX=723, EQ=724, TU = 745.  If your EX score goes up 17 points, your middle score is 740.

The EX mortgage score cares about installment loan balances.  EQ and TU do not.  (I.e. for EQ and TU you could owe almost the entire amount on the loan, or have paid off most of it.  No scoring difference.)

But note that those are a lot of ifs.  Maybe your middle score willl already be above 740.  Maybe it won't be but increasing the EX score won't change the middle score.  Etc.  So keep the loan paydown as something to consider only if you are in the above unusual situation.  And regardless do not do anything to pay either of them off.