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How every point affects mortgage loans? Should we pay off our debt before we save for a house?

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Xel
New Visitor
New Visitor

How every point affects mortgage loans? Should we pay off our debt before we save for a house?

Hi,

 

Our income recently had a major boost. We are now working on saving to move into a new home. Our current score is at an all time high of 692, with Experian, 690 with Transunion, and 670 with Equifax and simulators guess that if we paid off all our credit debt (about $3000 left) it'd go up to 722, not including aging. It will likely be at least a year before we can save to buy a house (unless we decide to try to risk selling or relocate for a higher paying job).

 

What I'd like your opinion on, is if we should pay off all out debt and then save to buy a house, or simply leave it as it is - minimum payments and manage and save our money starting now. Of course, I'd like to just save to buy the house ASAP as we've far outgrown our first house, but I'm wondering if, once we're past 700, if every little point really matters so much anyway to lenders or not? I mean, I don't want to drop another three grand for 10 points if it's not going to make a big deal to lenders.

 

For Experian, FICO simulator predicts that just from aging, in two years, our score would be about 762 at this rate if we keep going like we're going (we are young, only mid twenties, so young history). It also predicts that we'll be over 700 in three months anyway.

 

I appreciate your insight. 

 

P.S. Does anyone know why it seems like Equifax is so hard to get a good score with? It seems to match up in terms of accuracy with the others yet even in the simulator it never goes that high...so is this normal?

Message 1 of 9
8 REPLIES 8
Revelate
Moderator Emeritus

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?

Welcome to the forums!

 

It's not really a difference for FICO as utilization is instant in time anyway, but it's a rather substantial difference in finances.  Put simply, a ballpark average credit card APR is on the order of 20%, whereas a savings account or CD is 1-1.5% tops currently.

 

You're losing money by saving now vs. hammering your debt and then starting to save: ergo, while it's always good to have an emergency reserve, financially paying off your credit cards is one of the best if not the best financial decision most of us can make.  Even historical market returns are only 8% or thereabouts, credit cards are an expensive method for carrying debt long term.

 

ETA: the difference between a 690 and a 700 for me on a mortgage score is an additional 100k in a downpayment (20 vs. 30% down on a jumbo loan).  700 is a worthwhile goal when it comes to mortgage tiering.  Also be wary that the scores here aren't reference for mortgages anymore, and yours in particular might be lower: in this instance, clearing the debt is smart financially, and will look better for underwriting later, still recommend paying it down first.

 

Don't know on the Equifax score question, we recently changed to the FICO 8 model here and that's new territory, but for me my EQ scores have always trended lower than my TU/EX ones even though it was a cleaner report.  Others have different experiences: put simply, each bureau is slightly different in how the algorithm is calculated.  




        
Message 2 of 9
Xel
New Visitor
New Visitor

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?

Thanks for the response. It is true that it is expensive...our rates are definitely not good on any of the cards...In the end, it is about a difference of staying in our current home an extra three months or so and going credit debt free versus carrying the debt around for who knows how long...when it's put like that, it seems the choice is clear on what to do ultimately. 

 

I appended this question onto the end that maybe you can give an opinion on. I'm not new to credit monitoring but this one does elude me...."Does anyone know why it seems like Equifax is so hard to get a good score with? It seems to match up in terms of accuracy with the others yet even in the simulator it never goes that high...so is this normal?"

 

"ETA: the difference between a 690 and a 700 for me on a mortgage score is an additional 100k in a downpayment (20 vs. 30% down on a jumbo loan).  700 is a worthwhile goal when it comes to mortgage tiering."

 

Whoa, that's huge...but I'm wondering if the gap is still so wide after 700?

Message 3 of 9
Revelate
Moderator Emeritus

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?


@Xel wrote:

Thanks for the response. It is true that it is expensive...our rates are definitely not good on any of the cards...In the end, it is about a difference of staying in our current home an extra three months or so and going credit debt free versus carrying the debt around for who knows how long...when it's put like that, it seems the choice is clear on what to do ultimately. 

 

I appended this question onto the end that maybe you can give an opinion on. I'm not new to credit monitoring but this one does elude me...."Does anyone know why it seems like Equifax is so hard to get a good score with? It seems to match up in terms of accuracy with the others yet even in the simulator it never goes that high...so is this normal?"

 

"ETA: the difference between a 690 and a 700 for me on a mortgage score is an additional 100k in a downpayment (20 vs. 30% down on a jumbo loan).  700 is a worthwhile goal when it comes to mortgage tiering."

 

Whoa, that's huge...but I'm wondering if the gap is still so wide after 700?


Regarding mortage tiering, probably not but it's going to vary by lender as they set their own standards.  Jumbo lending is a squirrely space, always has been as lenders can basically roll their own standards as they may be stuck with the paper, but usually the tiers top out around the 740ish level as I understand it in the current mortgage market, and that does affect your rate.

 

I edited my own post after your edit (dueling edits!) but to reiterate, can't really say regarding Equifax as the bureaus weigh things differently and we have nowhere close to the amount of anecdotal data required to even toss out a rational suggestion on optimizing Equifax specifically.  Basically the best one can do is optimize based on what we know FICO to be looking for, and then let the scores fall where they will under the theory that a pretty report equates to a pretty score regardless of algorithm chosen.




        
Message 4 of 9
user5387
Valued Contributor

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?


@Xel wrote:

Hi,

 

Our income recently had a major boost. We are now working on saving to move into a new home. Our current score is at an all time high of 692, with Experian, 690 with Transunion, and 670 with Equifax and simulators guess that if we paid off all our credit debt (about $3000 left) it'd go up to 722, not including aging. It will likely be at least a year before we can save to buy a house (unless we decide to try to risk selling or relocate for a higher paying job).

 

What I'd like your opinion on, is if we should pay off all out debt and then save to buy a house, or simply leave it as it is - minimum payments and manage and save our money starting now. Of course, I'd like to just save to buy the house ASAP as we've far outgrown our first house, but I'm wondering if, once we're past 700, if every little point really matters so much anyway to lenders or not? I mean, I don't want to drop another three grand for 10 points if it's not going to make a big deal to lenders.

 

For Experian, FICO simulator predicts that just from aging, in two years, our score would be about 762 at this rate if we keep going like we're going (we are young, only mid twenties, so young history). It also predicts that we'll be over 700 in three months anyway.

 

I appreciate your insight. 

 

P.S. Does anyone know why it seems like Equifax is so hard to get a good score with? It seems to match up in terms of accuracy with the others yet even in the simulator it never goes that high...so is this normal?


If I was in this situation, I think I'd try to talk to some potential mortgage lenders and ask them specifically just how scores drive rates.

 

I don't know much about this for mortgages, but do know that scores drive some CC rates, and have seen tables put out by CUs that relate scores to APRs.

 

I'd also be tracking my 04 scores, the ones used in the mortgage business, so that there are no surprises as the time comes closer to take the plunge.

 

Message 5 of 9
HiLine
Blogger

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?

I agree with Revelate. My 04 and 08 scores are about 50 points different, but if I optimize anyway, I'll get the best I can under each model.
Message 6 of 9
Xel
New Visitor
New Visitor

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?

Will mortgage lenders really give me that kind of information?

 

Also, how can I track my 04 scores as well? 

Message 7 of 9
Revelate
Moderator Emeritus

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?


@Xel wrote:

Will mortgage lenders really give me that kind of information?

 

Also, how can I track my 04 scores as well? 


Pull it from Equifax (their Score Power product, or the Equifax Scorewatch product) or open an account at Digital Credit Union (DCU) for a monthly one.  Beyond that if you live in PA you can open an account with PSECU which at last report had the commonly used EX score.

 

Mortgage lenders will disclose their tiers if you ask them.

 




        
Message 8 of 9
user5387
Valued Contributor

Re: How every point affects mortgage loans? Should we pay off our debt before we save for a house?


@Xel wrote:

Will mortgage lenders really give me that kind of information?

 

Also, how can I track my 04 scores as well? 


Here's an example of a table that maps credit scores to mortgage APRs:

 

   http://www.myfico.com/myfico/creditcentral/loanrates.aspx

 

This table is based on averages rather than being somehow "official", and individual situations will vary.

 

If you do a bit of a Google search, I expect you can find a wealth of information along these lines.

 

Message 9 of 9
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