Advice on DTI and credit score

[mom2girls]

My husband and I about to close the sale of our current home and have a preapproval for new construction.  We are told 7 months to build new home.  My questions are these will it help or hurt to pay off all our debt (two cars, a loan, and credit cards) with the money from our sale of current home.  I know it would drop our DTI but I am not sure how it will affect our credit scores.  Its possible house could be built within 4-6 months which would put us in that "no major transactions for 6mth period".

Any advice is appreciated.

Thanks

[pizzadude]

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@mom2girls wrote:

My husband and I about to close the sale of our current home and have a preapproval for new construction.  We are told 7 months to build new home.  My questions are these will it help or hurt to pay off all our debt (two cars, a loan, and credit cards) with the money from our sale of current home.  I know it would drop our DTI but I am not sure how it will affect our credit scores.  Its possible house could be built within 4-6 months which would put us in that "no major transactions for 6mth period".

Any advice is appreciated.

Thanks

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What is your current revolving debt utilization ?   Paying down revolving debt is likely to increase your FICO score, whereas paying installment debt won't.

[mom2girls]

Our current revolving debt is about 50% utilization.  I know that is high and was using the credit for repairs and readying current home for market knowing we would be able to pay the revolving debt off with sale of home. 

I know paying down the revolving debt with boost scores but if I pay car loans off and decrease our DTI will this hurt our scores?  Will lenders look negatively if it drops our scores but improves our DTI?

Thanks again for your response

[pizzadude]

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@mom2girls wrote:

Our current revolving debt is about 50% utilization.  I know that is high and was using the credit for repairs and readying current home for market knowing we would be able to pay the revolving debt off with sale of home. 

I know paying down the revolving debt with boost scores but if I pay car loans off and decrease our DTI will this hurt our scores?  Will lenders look negatively if it drops our scores but improves our DTI?

Thanks again for your response

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Paying your revolving utilization down will give you a large FICO score boost, but paying installment debt, such as car loans, will not.   However if you need to improve your DTI and you can pay it, then by all means you should pay the car loans.

[ezdriver]

Did your loan officer pull a credit report and what are the scores? Since you express concern about scores, my assumption is that you know what they are. Bringing down your credit card utilization is a good thing and any underwriter will see that as a positive factor. Prepaying some of your installment loan will not affect your DTI because your payment will remain the same while your payoff period will be shorter. Both DTI and scores are important. Do you know what they are now and are you willing to share.

Let's say you are going after an FHA mortgage, a 640+ score will be good and a 660 won't do much for you. On the other hand, if you are at 625, then it will be very beneficial to get it to 640 or better.

The answer to your question is ... it depends.

[topa]

FICO scores do not consider incomes, so the income part of the DTI is a mute point in terms of scores. Low utilization of outstanding credit is another matter as others have pointed out.

[mom2girls]

Our LO pulled and I'm at 632, I know paying off cc debt will most likely bump score. We have enough equity that we can pay off in entirety our cc debt and both car loans and still have a nice chunk of change in bank. In paying off auto loans it will lower DTI, I'm just scared paying off will also ding my score.

[juggalo9er]

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@pay all omom2girls wrote:
Our LO pulled and I'm at 632, I know paying off cc debt will most likely bump score. We have enough equity that we can pay off in entirety our cc debt and both car loans and still have a nice chunk of change in bank. In paying off auto loans it will lower DTI, I'm just scared paying off will also ding my score.

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pay all of the cc balances to $0 except for one, leave that with 3% utilization. if your worried about dti, pay the loans off now! DO NOT WAIT....the reason i say do not wait as this will give the loans enough time to report paid off. it will have very little to no impact paying off an installment loan early. point in case....i refi'd my car during home loan process which in turn made one loan report paid and another installment loan freshly opened...the end result was a 6 point increase across the board. again ymmv this is just what happened with me

[TheGardner]

Sounds like you have 2 auto loans, if this is the case you can pay one off helping your DTI and leaving your scores in tact, may actually be even better as less installment loans.


Good luck!

[mccallb]

What revolving % do you recommend to see the biggest leap WRT actual fico (not fako)?

I'm around 28% right now.