@Anonymous wrote:
Hi everyone! First, thank you to everyone who posts on these boards. You have all helped me so much. I lurk around here a lot, but this will be my first post.
In August 2018, I bought a car. My credit score was terrible (mid 500's) so I am paying a lot in interest. My payment is $388/month. After that, I finally decided to start working on raising my credit. 9 months later, my score is 625 and rising.
I have decided that I want to buy a home. I am shooting for December 2020. My scores should be where I want them by then. I have a little over a year and a half to get everything ready. I need some advice on what to do with my car loan, though.
$388 is a large payment. It is raising my debt to income, thereby lowering what a lender would allow me to pay monthly for a mortgage. Should I:
Pay off my car loan over the next year and a half? That would lower my debt to income, which would increase my possible mortgage payment, allowing for a larger loan. The only problem is that my car loan is my only installment loan. I assume my credit score would drop, since part of a credit score is mix of accounts. I have 2 open credit cards.
Refinance my loan. My lender doesn't refinance, so I'd have to go to another bank. My credit has improved, so I believe I could get a lower payment, which would help my debt to income. However, wouldn't that be a new account? That would lower my age of accounts, and be a hard pull, which would lower my credit score.
I was also thinking that I could pay extra on my loan to where I'd be paying it off a month or two after I get a mortgage. I could then explain to whoever I get the mortgage from my situation, tell them the loan will be paid off very soon, and ask them to not figure it in to my debt to income. Does anyone even think that would work?
Any advice would be greatly appreciated. Thank you.
Hi:
Glad you're here, lurking and learning! You have a lot of scenarios and marginal credit still. The first thing that I would do is pull your actual FICO scores. If your credit score is low due to a thin file with high utilization, it's one thing. If your credit score is low due to a rash of late payments and charge offs, it's another. You absolutely can get a mortgage with scores in the 620 range. If you're a first time homebuyer with low income, you'll likely want to look into FHA programs; however, for the best interest rates--which, as you have realized affect your buying power by raising or lowering your monthly payment--you'll want scores over 740. That will take time and work.
You have a year and a half, and it's doable unless you have BK, chargeoffs, and collections on your file that aren't aged to drop off your report prior to your application.
To get your file where you'd like it, you'd ideally have a clean credit report with no chargeoffs or collections; pull your credit report yourself (it sounds like you have already) and get to work. (1) If you have chargeoffs or collections, and especially if they are old, I'd search the forums for "pay for delete" contacts. MAKE SURE YOU CONTACT THESE CREDITORS TO PFD BEFORE YOU APPLY FOR A MORTGAGE! If you wait until after, they'll hold out for full payment and often refuse to delete because they know that many (not all) loan officers would require the collections paid to approve the mortgage. (2) I would then make sure you have 3 active revolving tradelines that are not installment loans. You need to make sure that you have self-control and understand credit. If you don't and you've had problems in the past, be very, very careful with this. You should keep these cards reporting at zero (charging something small once a month to keep them active, but not "using" them) until close to the time to app. Then, you should make sure one card reports a small balance (typically 8% of it's limit)--this needs to be a true credit card, not a store card or otherwise branded card.
As to the vehicle. 1) Your credit scores are still too low and the loan too new to get a decent rate on a refinance unless you have a co-signer. I'd keep paying on it as agreed for a few months while you work on cleaning up your credit; 2) By December, with no undeleted collection/charge offs or BKs, you should have scores in the 700 range. Then and only then, look for a new lender to refinance with. Because your credit file is newish, you'll probably get the best rates with a credit union, which I highly recommend. Open an account with one of hte recommended ones if you can get in (PenFed, DCU or Navy Federal). Their rates are still fairly competitive, though rising, on auto refinances.
If you do this in December 2019, you should have scores right where you need them to be in December 2020. Presuming that you don't max out your credit cards and buy a bunch of stuff you don't need in the months running up to your app 
(Basically, act like the cards don't exist except to use them enough to keep them from canceling for inactivity).
Keep lurking--I'd check out the credit card forums for tips on scores and application changes on a couple of new cards IF you don't have 3 open revolving accounts that you are the primary on. Most mortgage brokers/loan officers discount cards that you're merely an AU on, though it can help your utilization and your score a lot, so it's worth being on if you have high utilization.
Anywhoo, good luck!
Have you considered paying down your loan but keeping a small balance on it, enough to keep making payments through the time you're applying for a mortgage? That way your installment loan stays open, and your DTI ratio looks good, too 
@MovingOnward wrote:Have you considered paying down your loan but keeping a small balance on it, enough to keep making payments through the time you're applying for a mortgage? That way your installment loan stays open, and your DTI ratio looks good, too
I have thought about that. I think it would look good for my total debt amount, but I would still be paying almost $400 a month. My monthly bills would still be abnormally high, leaving me with less to pay a mortgage.