topic Re: What sort of installment loan will help me best to get a mortgage? in Mortgage Loans

What sort of installment loan will help me best to get a mortgage?

pdxuser — Wed, 15 Oct 2008 04:46:38 GMT

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!

Re: What sort of installment loan will help me best to get a mortgage?

Junejer — Wed, 15 Oct 2008 05:14:14 GMT

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

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Wed, 15 Oct 2008 05:37:55 GMT

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?

Re: What sort of installment loan will help me best to get a mortgage?

DallasLoanGuy — Wed, 15 Oct 2008 16:58:30 GMT

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

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Wed, 15 Oct 2008 17:18:46 GMT

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

Re: What sort of installment loan will help me best to get a mortgage?

DallasLoanGuy — Wed, 15 Oct 2008 17:30:58 GMT

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.

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Wed, 15 Oct 2008 18:40:26 GMT

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!

Re: What sort of installment loan will help me best to get a mortgage?

Anonymous — Wed, 15 Oct 2008 19:18:29 GMT

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.

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Wed, 15 Oct 2008 19:28:54 GMT

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?

Re: What sort of installment loan will help me best to get a mortgage?

Anonymous — Wed, 15 Oct 2008 19:44:32 GMT

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.

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Wed, 15 Oct 2008 20:20:47 GMT

Well, I'm not too worried about the score itself, since the FICO estimator says I can get a score of 695-745 with just one card for 6 months if util is under 10% (though I'll likely get three cards to avoid a thin history). I'm more interested in the extra considerations mortgage officers make, and whether a tiny past loan will cut it, or if I should take out a four-digit loan for my next laptop instead. Either would likely be paid off before I apply for a mortgage.

And is there something special about a 12-month loan, or would a 24-month be cool in the case of the laptop?

Re: What sort of installment loan will help me best to get a mortgage?

Anonymous — Wed, 15 Oct 2008 20:38:45 GMT

The "special" thing about the 12-month loan is the history - they're looking for a minimum of 12 months of good payment history on the loan. So it could be 12 months or 120 months; they don't care as long as you pay on time & your DTI is in line. As for the amount, I don't know if large or small makes a difference to a mortgage person. I have seen instances where auto lenders won't lend (for example) 40k for a car if the largest TL you have is 5k and your credit file is otherwise pretty sparse. But that's auto - not sure the same rules apply to mortgages.

Re: What sort of installment loan will help me best to get a mortgage?

DallasLoanGuy — Thu, 16 Oct 2008 13:57:26 GMT

agree with desi

the term isnt important. the history is

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Thu, 16 Oct 2008 20:16:33 GMT

And does the amount factor at all?

Re: What sort of installment loan will help me best to get a mortgage?

pdxuser — Tue, 21 Oct 2008 16:05:00 GMT

Ok, I'm thinking I'll get a $500, 12-month share-secured loan from my credit union (very-low-interest $500 loan with a $500 savings deposit as collateral) and set up automated payments. I could even pay off $488 immediately and just have $1 (plus interest) automated payments each month, which allows me to maintain a low util for the duration of the term, and minimizes the already-minimal interest I pay.

I just want to make sure that debt that is 100% secured by money looks just as good on a manual review as any other installment loan (because it frankly sounds ridiculous to me). I'm also wondering if, at the end of 12 months, the report a lender sees would show that nearly 98% of the principal was paid back immediately, or if they'd just see 12 nice green OK's in a row? And finally, are you sure the fact that someone had to take out a personal loan for a measly $500 is just as attractive in a mortgage lender's eyes as if that person had paid off their $22,000 car loan in 12 months?

Re: What are consumer finance company accounts?

Anonymous — Mon, 19 Nov 2012 23:02:12 GMT

@Anonymous wrote:
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.

What are consumer finance company accounts?

Re: What are consumer finance company accounts?

llecs — Mon, 19 Nov 2012 23:17:59 GMT

@Anonymous wrote:
What are consumer finance company accounts?

That poster hasn't been on for 3+ years. But a Consumer finance account (or CFL) are seen as higher risk accounts by creditors. Payday loans are a good example. Others include loans by creditors like CitiFinancial, WellsFargo Financial, One Main Financial, and others like that. IMO, it isn't a deal killer at all if you have one, but it can produce a small FICO ding if reported.

Re: What sort of installment loan will help me best to get a mortgage?

Lasardo — Tue, 20 Nov 2012 17:44:19 GMT

I got a "credit builder" account through my local bank (BMO) but most credit unions are offering these.
It is a loan that you choose the amount (generally between 2-5 years) to pay it. The funds are put in a CD that you choose the amount of time to receive the funds..
As you make on-time payments ( I went with 2k for 48 months at $87 a month) it is reported to the credit bureau as an installment loan.
I gained 34 points in 6 months, I know this because they accidentally closed it and my credit score dropped 34 points, after it was reopened I gained the points back.
This is a great way to save and build credit!