Mortgage Loans

[pdxuser]

I'm just starting to build a credit history, with the goal of a mortgage in a few years. I read that it's helpful to have installment loan(s?) in addition to credit cards because they have a particularly beneficial effect on the type of credit scores mortgage officers look at. So I'm wondering how to plan my installment loans: when I should get one, should I get more than one, how much should they be for, how long the terms should be, etc. For instance, once I pay one off, does it stop being useful to my score? Are two or three loans notably better than one? Would two-year financing on a toaster oven be just fine? I won't be purchasing a new car. Thanks!

[ByrdMan]

Installment loans are not necessary to get good FICO scores. If you don't need the debt, then I would suggest not getting a loan. If you have CCs, then keep the util % low (between 1-9%) util.

Before I got back in the world of CCs last year, my FICO got up to 768 with just an installment loan. There are members who have over 800 FICOs with just CCs and no installment loans. My scores were best with one CC with 5% util and one installment loan (790).

HTH

[pdxuser]

I had read that mortgage officers usually look at a slightly different FICO score that values installment loans more than the classic FICO does, and that mortgage officers like to see some history with use of loans, even if that doesn't materially affect the credit score itself. Is this true?

[DallasLoanGuy]

A lot of people are able to get a secured loan thru a credit union using a paid off auto as collateral.

Just don't spend the money....

 I like to see 12 months.... but the FICO warriors here may be better at telling you how to structure

[pdxuser]

An auto loan isn't an option for me in this case...

[DallasLoanGuy]

i wasnt talking about an auto loan. just a 12 month installment loan with something to collateralize the deal. lots of people use a paid off auto, but maybe you can think of something else for collateral.

stay away from finance companies.
 

[pdxuser]

Sorry, I misread. But why would the mortgage officer care whether I used something as collateral? Also, do I want this loan to still be active when I apply for the mortgage? And does it matter whether it's for a $50 blender or a $1500 laptop? Thanks!

[desifink]

The mortgage officer won't necessarily care. I think the point being made about collateral is that you said you're building your credit, and it's easier to get a secured loan than an unsecured loan.

Here's what I've learned about the impact of installment loans since I joined these forums (fora?). I'm sure the experts can weigh in as well - and you may want to post this in General Credit Issues or Building Credit.

• You will likely see a dip in score due to the inquiry and new account (new account will impact your average age of accounts). That will go away in 3 - 6 months, most likely.
• For mortgage purposes, the main thing that will impact you is the loan payment and its effect on your DTI, if the loan is still open when you apply for your mortgage. If you have a $500/month loan payment, obviously you'll be able to afford much less house than if you have a $50/month loan payment.
• As Dallas (I think) said, a 12 month minimum payment history is best to establish responsible use of credit. If you want to pay it off & close it out at month 13, it will still show on your credit report for another 10 years, and you'll enjoy the benefit of the good payment history and account age.
• If you do take a loan, pay it down to at least 80% util immediately. While installment loan utilization doesn't figure as heavily into your score as CC util does, it will still help.
• Do not - repeat DO NOT - take a loan from a consumer finance company. FICO doesn't like seeing those.
• The amount of the loan doesn't matter for FICO scoring; payment history and util does.
• As for the number of loans you should have, this all depends on your bucket and personal credit scenario. YMMV. I'd probably start small with one and see how that works out.

[pdxuser]

Thanks! So would a single 12-month $50 loan from my credit union that was paid off 2 years ago be enough to give a mortgage officer comfort, or would a bigger loan be better? What if I made it a 2-year loan?

[desifink]

Not being a LO, I can't speak to what would make them most comfortable, other than saying a small payment like $50 likely won't make them nervous that you might default on it or your mortgage, and won't ding your DTI much if at all.

From a strictly credit-building & score-building perspective, that loan would improve your credit mix, and that, combined with the account history and on-time payments, will reflect positively on your score.