How to maintain FICO score in gap between mortgages

[desertoaks]

I'm selling my home and then paying off my mortgage.  I may not be getting another mortgage for a year.  I have no other installment loans.  What can I do to keep my current really good FICO score for when I go for that next mortgage?

[Anonymous]

Do you have other revolving credit, comprising a thick file?

If you do, I probably wouldn't worry too much about it. You'll see a drop in score, but as long as you're using revolving credit responsibly, it should climb back up to the same, or close to it, by the time you're ready to house hunt again.

If your file isn't that thick, I might look into either getting a car (new installment loan, which will be good for credit mix, but, only if you have a need and if it's not taking much away from saving for your next down payment - I am not suggesting you go out and buy something you can't afford) and/or adding another 1 to 2 credit cards that you can work on using/growing in that time. I would *think* you'd want to do these things before selling while you still have the benefit of the score boost, but that might be dependent on your DTI, and whether you've experienced any major income changes (in the southern direction) that might make this improbable. Others who have been in this scenario might be able to offer more relevant advice about if/when to app for more credit (I know it's a no-no to do so for the 6+ months leading up to a mortgage, but not sure if it had an impact when selling, and/or if you turn a profit from the sale, whether the "income" and impact on DTI will be better and overcome the point drop from losing the reporting of the mortgage.)

That's what would make sense to me based on my general knowledge of credit, but having no personal experience with a mortgage, I would definitely also seek a second opinion from anyone who may have been in your shoes.

[desertoaks]

Thank you GettingThere20.  Those are some good points.  I do have a good substantial revolving credit file.  I'm also going to need to replace my long since paid off car sometime but wasn't sure when in this relocation process I should do that -- now before selling the house, after selling the house while in temporary lodgeing or after I buy another house?

[Anonymous]

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@desertoaks wrote:

Thank you GettingThere20.  Those are some good points.  I do have a good substantial revolving credit file.  I'm also going to need to replace my long since paid off car sometime but wasn't sure when in this relocation process I should do that -- now before selling the house, after selling the house while in temporary lodgeing or after I buy another house?

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Okay, so you've got a good revolving credit file, so let's look at this methodically. 

Option 1: buy car before selling house. 

Pros: you'd have the scoring benefit of the mortgage and the mix of credit it brings, which will assist in getting a better rate on your auto loan.

Cons: you'll have to come up with a down payment. You could sell or trade in your current vehicle, of course, but it's not a bad idea to have some cash to put down as well. If you haven't already saved for this (and no doping into your ER fund) then where are you getting the money for this? 

Option 2: buy after selling the house

Pros: you might be able to turn a profit on the sale, meaning you'd potentially have to borrow less on your auto loan if you can take some of the profit from the home sale and use it. Your DTI will also be significantly improved. Both those factors reduce your risk, and might qualify you for the same or better rates on an auto loan as if you had the mortgage still reporting. 

Cons: you won't have the mortgage reporting, and might experience a score dip.

Option 3: honestly, from where I sit, I don't think you should consider this one. The point is to obtain the car loan to show a mix of credit, and optimize your score in preparation for your next mortgage. Waiting to buy the car until after you buy your next home is going to defeat the purpose. Plus, depending on your current vehicle, you run the risk of sinking money into it that could be going toward your new home's down payment.

Here are the wildcards:

- do you currently have a down payment for a new car saved? If not, how feasible is it to save 20% of the vehicle you want? 

- do you realistically stand to turn a profit from the sale of this home? If so, has that money already been earmarked for the down payment of your next home, or other important financial goals/obligations? If you've planned to use 50% of the profit on "responsible" things (savings, IRA, paying down debt) and the rest for fun stuff (that 60" TV you've been drooling over for a year) make sure you're taking your car's down payment out of the fun fund. Don't short-change your long term financial goals for it.

The more I'm looking at this, the more I'm thinking #2 is your way to go. If you've already got a down payment for a car saved up, great. Then, if/when you make a profit from a home sale, you can bolster it with any funds you don't have earmarked for other goals. This is not an invitation to buy a more expensive car, but rather, in conjunction with the improvement of your DTI by no longer having a mortgage, you borrow less/pose less of a risk and qualify for better rates while still getting the long-term benefit of an installment loan.

That's the way I see it. Other forum members, please poke holes in my theory!

[desertoaks]

Thanks, again, GettingThere20,

I'm going to think over what you've said.  I want to keep any profit I get from the house sale earmarked for my next home's downpayment but I do have a 20% car downpayment saved.  So would Option 1 & 2 be about equal in maintaining the highest FICI score possible?

[Anonymous]

Good for you for having a goal with the profit from the sale of the home!

However, this is where I'm admittedly getting out of my element.

I think I'm wrong about your DTI necessarily improving without the mortgage. I was of the (erroneous) understanding that because rent payments weren't "debt" in the sense that if you stopped paying it, you'd have a defaulted loan in your name, and thus wouldn't factor into DTI calculations. However, a Google search does seem to indicate that rent does in fact factor into DTI. Which really does make sense, since it's money out and you have to spend it. You can't curtail your rent expenditure the way you can your groceries, or eating out, etc.

So, with that in mind, what is less expensive, your current mortgage, or your estimated rent payment? Are you specifically planning to downsize with this move in order to save money?

If you are planning to downsize, and it's a sure thing that you will, then the change in DTI would probably still work to your advantage, and you should wait post-sale.

However, if you expect to be paying the same in rent as you do in mortgage payments (and I'd wager that if you're unsure, then you should plan on the expense being equal) then I'd say go ahead and let your current score work for you.

There are a number of DTI calculators/analyzers online, maybe you could give them a whirl to get some more insight?

[desertoaks]

I think I'm following you but I didn't think a FICO score used a person's DTI.  How would they know what a person's income is?

[CreditDunce]

If you have really good scores now, you may not need to do a thing.   Not having an open installment loan will hurt your scores a little, but it is quite possible your FICO scores will be over 800 even without the open mortgage.  If don't worry about your FICO score, do what is best to save you money.  

On the other hand, if you need a new car, then buying a car at least 1 year before applying for a new mortgage certainly makes sense with today's low interest rates.   The one draw back is if you are borderline for being able to afford your new house, the auto loan could push up your DTI causing you to be denied.  DTI is not part of FICO, but a bank will only approve you for so big of a mortgage based on your DTI.   It is something you are likely going to need to worry about with a large downpayment from your current home sell.  But DTI is a bigger reason why mortgages are denied than FICO score.

The other option that hasn't been mentioned is you could get a small shared secured loan (e.g. $500 with a 4 year term, $11 payment per month).   It doesn't look as good as a car loan.  But it will help your FICO just about as much.  And since the payment is so small it barely hurts your DTI at all.   As a matter of fact, you could mostly pay it off right before you applied for a mortgage for the maximum score boost.