cancel
Showing results for 
Search instead for 
Did you mean: 

Using money to pay off auto loan vs down payment

Auto Loans for ANY Credit Situation. Immediate Response.
Advertiser disclosure
Established Member

Using money to pay off auto loan vs down payment

So we were pre-approved for a mortgage for about $335k. It’s better than nothing but that leaves us without hardly any options. Credit cards and all of that have been paid off. The only things left are a student loan $40 per month and auto loan of $340 per month. There’s $16000 left on the loan. We have about that as a down payment. Our best option for a mortgage is a program that also has a no down payment option. It seems if we paid off the auto loan it would drastically increase what we could borrow and just do a no money down mortgage. Broker said it was better to have the money liquid but we live in a HCOL area and moving isn’t an option. The amount we’ve been approved for essentially prevents us from buying.

If we paid off the auto loan we’d actually only pay it down to the point where it isn’t included. I know paying it off can actually hurt your score otherwise we’d just put it in someone else’s name. Scores are right on the cusp of what we want. He would still have the student loan for an jnstallent loan so if I’m wrong in my thinking and totally getting rid of the auto loan wouldn’t hurt, please let me know.

Any insight would be helpful. Thanks!
Message 1 of 5
4 REPLIES 4
Regular Contributor

Re: Using money to pay off auto loan vs down payment

Would you be able to provide more information, such as your monthly income? That would help determine your DTI. But personally, I lost an upward of 42 pts from paying off a card. Yes, it helped my DTI but my DTI was already low with the car loan so it was a double wammy for me. 

Message 2 of 5
Moderator Emeritus

Re: Using money to pay off auto loan vs down payment


@nguyenlm0629 wrote:

Would you be able to provide more information, such as your monthly income? That would help determine your DTI. But personally, I lost an upward of 42 pts from paying off a card. Yes, it helped my DTI but my DTI was already low with the car loan so it was a double wammy for me. 


Not on a mortgage score, or seriously unlikely anyway.

 

OP: 2/3 of the mortgage scores don't seem to react at all to installment utilization, and if you don't qualify for a home based on DTI calculations I would suggest you don't have a lot of choice.  

 

If you can pay it down to where it no longer counts, like $50 remaining or whatever, that is probably the best of both worlds, might help one score and clears your DTI, but I thought lenders changed that for auto loans some time ago?  I'd double-check with your LO / UW.

 

Anything beyond that like strategically optimizing revolving utilization, I'd suggest asking over in Understanding FICO Scoring.




        
Message 3 of 5
Frequent Contributor

Re: Using money to pay off auto loan vs down payment

Normally, if there are only 10 payments left, the lender will not count it in your debt ratio. The problem us that the credit bureau shows the start date and term of loan. So if they see that there should be 3 years remaining on the car loan but there are only 10 payments remaining or less, they will unfortunately still count it toward debt ratio.

They go by - how many payments are left based on the term shown on credit report. According to FHA guidelines, even if you truly did have only 10 payments left but the monthly car payment of $340 is above 5% of your gross monthly income, FHA must count that toward your debt ratio. I didn't believe this when I found out, I had to verify it in HUD guidelines myself.
Message 4 of 5
Valued Contributor

Re: Using money to pay off auto loan vs down payment


@capecodcredit wrote:
So we were pre-approved for a mortgage for about $335k. It’s better than nothing but that leaves us without hardly any options. Credit cards and all of that have been paid off. The only things left are a student loan $40 per month and auto loan of $340 per month. There’s $16000 left on the loan. We have about that as a down payment. Our best option for a mortgage is a program that also has a no down payment option. It seems if we paid off the auto loan it would drastically increase what we could borrow and just do a no money down mortgage. Broker said it was better to have the money liquid but we live in a HCOL area and moving isn’t an option. The amount we’ve been approved for essentially prevents us from buying.

If we paid off the auto loan we’d actually only pay it down to the point where it isn’t included. I know paying it off can actually hurt your score otherwise we’d just put it in someone else’s name. Scores are right on the cusp of what we want. He would still have the student loan for an jnstallent loan so if I’m wrong in my thinking and totally getting rid of the auto loan wouldn’t hurt, please let me know.

Any insight would be helpful. Thanks!

A couple of questions.

1) What area are you looking to buy in? Is it eligible for USDA?

2) What type of loan where you pre-approved for?

3) Which zero down loan are you looking at?

4) What is your gross monthly income?

 

There are a couple of concerns with the car loan. 

1) Once you pay it off & the account closes, your scores are likely to go down. If you can find a home & close in 90 days, this may not matter.

2) You generally cannot exclude an account when the payment for that account is significant enough to effect your ability to make the mortgage payment.

One option would be to set your file up to have the car loan paid off at closing. That way your not at risk of having the account affect your scores.

VA Mortgage Expert. Mortgage Banker lending in All 50 States.
VA, FHA, USDA. Jumbo, Conventional.
CAIVRS Expert.
Message 5 of 5
Advertiser Disclosure: The offers that appear on this site are from third party advertisers from whom FICO receives compensation.