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Mortgage Preparation: Student Loan Question

treefrogger
New Contributor

Mortgage Preparation: Student Loan Question

For the purpose of preparing to open a new mortgage, would it be better if I paid off my last student loan which has ~$1500 remaining, or should I just put that money toward the down payment?  Credit scores are 832/815/829.

 

I am somewhat concerned that having the installment loan gone from the account mix may do some damage to the current scores, but at the same time, it would lower the debt-to-income ratio.

 

Thanks for your replies!

Message 1 of 4
3 REPLIES 3
youdontkillmoney
Valued Contributor

Re: Mortgage Preparation: Student Loan Question

We chose to get rid of the wife's, to have zero debt on our app when we do app. It helps the DTI, psychologically a boost, and the FICO may go down a bt but if you don't plan to app for a few months, it'll go back up again. The wife's FICO score is still 836 even though the report reflects the decrease in student loan balance. I  don't look at the FICO day to day, but over a few months. You'll be fine, you have strong financial stats to start. Advice: get rid/pay off your student lona and be done with it.

Message 2 of 4
dpeezy
Valued Contributor

Re: Mortgage Preparation: Student Loan Question


@youdontkillmoney wrote:

We chose to get rid of the wife's, to have zero debt on our app when we do app. It helps the DTI, psychologically a boost, and the FICO may go down a bt but if you don't plan to app for a few months, it'll go back up again. The wife's FICO score is still 836 even though the report reflects the decrease in student loan balance. I  don't look at the FICO day to day, but over a few months. You'll be fine, you have strong financial stats to start. Advice: get rid/pay off your student lona and be done with it.


If there ten payments or less remaining? What is the current monthly payment amount? This is straight from Fannie guidelines:

 

"All installment debt that is not secured by a financial asset—including student loans, automobile loans, and home equity loans—must be considered part of the borrower’s recurring monthly debt obligations if there are more than ten monthly payments remaining. However, an installment debt with fewer monthly payments remaining also should be considered as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet his or her credit obligations."

 

Even if you pay it off, I'm sure your scores will stay over 760. You get the best possible rate/PMI combination at 760+, so I wouldn't even worry about the credit score aspect of it.

Mortgage Loan Officer licensed in CA & AZ


Message 3 of 4
Revelate
Moderator Emeritus

Re: Mortgage Preparation: Student Loan Question


@dpeezy wrote:

@youdontkillmoney wrote:

We chose to get rid of the wife's, to have zero debt on our app when we do app. It helps the DTI, psychologically a boost, and the FICO may go down a bt but if you don't plan to app for a few months, it'll go back up again. The wife's FICO score is still 836 even though the report reflects the decrease in student loan balance. I  don't look at the FICO day to day, but over a few months. You'll be fine, you have strong financial stats to start. Advice: get rid/pay off your student lona and be done with it.


If there ten payments or less remaining? What is the current monthly payment amount? This is straight from Fannie guidelines:

 

"All installment debt that is not secured by a financial asset—including student loans, automobile loans, and home equity loans—must be considered part of the borrower’s recurring monthly debt obligations if there are more than ten monthly payments remaining. However, an installment debt with fewer monthly payments remaining also should be considered as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet his or her credit obligations."

 

Even if you pay it off, I'm sure your scores will stay over 760. You get the best possible rate/PMI combination at 760+, so I wouldn't even worry about the credit score aspect of it.


Was there a date on this or is that lender specific (overlay changing for example, though can't see why they would do that if it falls under QM anyway)?  Sometime around the first of this year IIRC people were stating that no longer was in effect.  

 

@OP: The mortgage trifecta which virtually every lender underwrites on doesn't penalize anywhere close to as heavily as FICO 8 for installment lines open / installment line utilization: my FICO 8's took a non-trivial drop but my Beacon 5.0 didn't blink (did have two other open installment lines and a dirty file, YMMV) but my other two mortgage scores were absurdly high in comparison to what I was honestly expecting and there's just no way rationally took a major drop on those for paying off my auto loan or other installment loan unlike FICO 8.

 

As everyone else has recommended, top floor is 760+, your scores are gold plated and I don't think you'll have anything to worry about on that front regardless even on FICO 8 which is irrelevant to mortgage underwriting.




        
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