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I've recently sold my home and paid off the mortgage. I'm currently living in an apartment while I'm building my next home and I noticed that today and Monday both Eq and Ex updated my scores and decreased by 26 and 32 pts respectively for FICO 8. The only alert I had was that the mortgage account went to zero and changed to "Closed or paid off Real Estate Mortgage Account". Why such a dramatic decrease for decreasing my debt by more than 50%?
Fico 8 looks at installment loan balance to loan ratio in aggregate for scoring.
So if you have two OPEN loans (say a $100,000 mortgage and a $15,000 car loan) then your aggregate loan is $115,000.
Now let's say you have a $5,000 outstanding on both loans. Then your aggregate B/L is 10k/$115k = 8.7%
If you pay off your mortgage, your new B/L ratio is based on your car loan only: $5,000/$15,000 = 33.3%
It's the increase in open loan aggregate B/L that results in a score drop. That is not unusual if the closed loan is a mortgage.
Now, if in the above situation the car loan were paid off leaving only the mortgage, open installment loan B/L would go from 8.7% to 4.3% - no score drop occur
That makes sense, does this effect the FICO mortgage scores as much as the FICO 8s?
It is not a factor with the Fico 04 model - so no impact on score. Both EQ score 5 and TU score 4 are based on the Fico 04 algorithm. The 3rd mortgage score, EX score 2 is based on the Fico 98 algorithm. That score is influenced by installment loan B/L but, to a lessar degree than Fico 8.
@Thomas_Thumb wrote:It is not a factor with the Fico 04 model - so no impact on score. Both EQ score 5 and TU score 4 are based on the Fico 04 algorithm. The 3rd mortgage score, EX score 2 is based on the Fico 98 algorithm. That score is influenced by installment loan B/L but, to a lessar degree than Fico 8.
Thank you T_T... this info is golden!
If it seems possible that your Experian mortgage score will end up as the median score at the time you plan on applying, the technique described in the initial posts of this thread may be of value to you.
Also, myFICO currently offers a product that provides you with a full 3B report (including mortgage scores from the three bureaus) monthly rather than quarterly. You may find it useful to subcribe for a month or for the duration of your preparations to file a mortgage application.