FHA -- thin credit file

Anonymous · ‎07-14-2016

Long time lurker finally posting for the first time! Usually I'm able to find the answers to my questions in other threads, but this one is specific enough that I'm puzzled and not sure what to do.

My husband and I are looking to buy our first home, hopefully by the end of this year. He is a full-time college student, so the mortgage will be in my name (but we live in a community property state, so his student debt will be included in our DTI).

When applying for an auto loan 2 years ago I was told that I had a "thin credit file" and received a higher interest rate. I am concerned that this issue will come up again and result in a denial for an FHA loan.

I have:

A credit card-- open for 6 years

B credit card (authorized user, husband's card)-- open for less than 1 year

C credit card-- open for 2 years (ish)

Closed-- 2 student loans which I just paid off last month.

Closed-- auto loan that I paid off 4-5 years ago.

Last but not least, I have a current auto loan that I was planning to pay off next month. Paying off this auto loan will definitely make our DTI more favorable (my husband has a considerable amount of student loans in deferment, but we have no other debt), but I'm concerned that it will lead to the "thin credit file" problem.

Is it possible for me to keep the line of credit on my report by paying off most of the auto loan so that there are fewer than 10 payments left? If I understand the process correctly, this would result in it being counted as a lower payment for DTI calculations.

TL;DR: How important is it to my FHA application to have an installment loan on my credit report?

Extra info, if helpful:

-DTI (before mortgage) if we include the auto loan at full amount is 15%. If we eliminate the auto loan entirely it's 11%. If I pay it off to fewer than 10 installment payments left it's 12%.

-Haven't pulled FICO score yet but I estimate around 700 based on my CreditKarma.

-No derogatory marks on my credit.

-A little over a year at my current job, before then I was in college. It's a yearly contract position so I'm able to prove stability easily.

StartingOver10 · ‎07-14-2016

We are glad to see you post!

Car loans and mortgages are totally different processes. I'm not surprised that the auto loan people upped your rate a little bit because that is what those auto F&I guys do - they look for ways to increase your rate because it gives them extra commission at the time you buy the vehicle.

This isn't the way mortgages work.

For FHA you qualify or you don't - the rates are different from lender to lender but they don't tier your rates for FHA loans like they do conventional loans based on your score.

Also for FHA type loans you can have alternate credit if you don't have enough tradelines for the lender you use. This is all good.

Your Credit Karma score is truly meaningless in the mortgage world. It has no relationship to FICO scores. Your actual mid FICO score could be higher or lower as it is a totally different formula.

Take the time to pull the 3 B report here so you can see where you are with your mortgage scores. At least then you are working with real information.

The most important part for mortgages is your DTI (Debt to Income ratios) as well as your credit. So more likely than not, the payoff of your auto loan will help you, The amount of mortgage for which you qualify is based on your income and the amount of debt you have + the new mortgage payments.

Some lenders won't count a vehicle loan against you if less than 10 payments remain. Others count the vehicle payment in your ratios right up until the day it is paid off. This is lender specific.

Anonymous · ‎07-14-2016

Thank you for your help, StartingOver!

I'll definitely pull the 3B; I was just waiting until my accounts were all updated to what they should be at when we apply.

For the mortgage process, if I go ahead and pay off the auto loan to make my DTI more favorable will the lenders be able to consider the payment history for the accounts I've paid off (the 2 student loans and 2 auto loans)? Or does that even matter?

Anonymous · ‎07-14-2016

Credit Karma is nice to keep an eye on how things are trending but it's essentially a fake score.

I completely echo the above post that you should get the Fico "3B" report that has all your scores in it.

My credit karma score was 715 and my middle mortgage score was 660, pretty large difference. It also helps that the mortgage scores on the 3B report are usually the exact scores that will be pulled. Mine were exactly the same.

If you are going for FHA you should be fine with all the info you provided. Depending on your purchase price, they will also want to see adaqaute cash reserves to close so be aware of that.

Me and the wife were in a much worse position in regards to our credit profile. Thinner than yours and derogs as recent as 1.5 years ago. Process was relatively smooth and we got the clear to close last week on a 30 year FHA (close date is 7/27) Good Luck!

StartingOver10 · ‎07-14-2016

@Anonymous wrote:
Thank you for your help, StartingOver!

I'll definitely pull the 3B; I was just waiting until my accounts were all updated to what they should be at when we apply.

For the mortgage process, if I go ahead and pay off the auto loan to make my DTI more favorable will the lenders be able to consider the payment history for the accounts I've paid off (the 2 student loans and 2 auto loans)? Or does that even matter?

It helps to have good payment history in your score (it is 35% of your score).

And it helps to have good payment history in a manual review in underwriting. If you get automated approval -then it isn't as important - but for sure have on time payments for at least 12 months and the longer the better

Anonymous · ‎07-14-2016

Merlin, thank you so much! Congrats on being so close to closing

If needed, the cash reserves are usually around 3 months of mortgage payments, correct?

Anonymous · ‎07-14-2016

Thanks again! I'm crossing my fingers for the automated approval, but who knows.

Anonymous · ‎07-20-2016

@Anonymous wrote:
Long time lurker finally posting for the first time! Usually I'm able to find the answers to my questions in other threads, but this one is specific enough that I'm puzzled and not sure what to do.

My husband and I are looking to buy our first home, hopefully by the end of this year. He is a full-time college student, so the mortgage will be in my name (but we live in a community property state, so his student debt will be included in our DTI).

When applying for an auto loan 2 years ago I was told that I had a "thin credit file" and received a higher interest rate. I am concerned that this issue will come up again and result in a denial for an FHA loan.

I have:
A credit card-- open for 6 years
B credit card (authorized user, husband's card)-- open for less than 1 year
C credit card-- open for 2 years (ish)
Closed-- 2 student loans which I just paid off last month.
Closed-- auto loan that I paid off 4-5 years ago.

Last but not least, I have a current auto loan that I was planning to pay off next month. Paying off this auto loan will definitely make our DTI more favorable (my husband has a considerable amount of student loans in deferment, but we have no other debt), but I'm concerned that it will lead to the "thin credit file" problem.

Is it possible for me to keep the line of credit on my report by paying off most of the auto loan so that there are fewer than 10 payments left? If I understand the process correctly, this would result in it being counted as a lower payment for DTI calculations.

TL;DR: How important is it to my FHA application to have an installment loan on my credit report?

Extra info, if helpful:
-DTI (before mortgage) if we include the auto loan at full amount is 15%. If we eliminate the auto loan entirely it's 11%. If I pay it off to fewer than 10 installment payments left it's 12%.
-Haven't pulled FICO score yet but I estimate around 700 based on my CreditKarma.
-No derogatory marks on my credit.
-A little over a year at my current job, before then I was in college. It's a yearly contract position so I'm able to prove stability easily.

Made me chuckle. Depends on the lender, some do not require any installment loans.

DallasLoanGuy · ‎07-21-2016

some lenders are ok with a this credit file.

a lender i worked for 3yrs ago needed 3 open trades with 12+ month history. and one of those need to be 'significant'(which means a car loan, not a $25 credit card pmt).

last two i worked for dont have that requirement.

just ask the loan officer before you apply.

Retired Lender