Mortgage payoff and FICO score

[Anonymous]

So do they treat mortgages and installment loans the same?

That would seem so weird... everytime I bought a house, my credit rating would plummit.. B/L of 100% for 10 years :-)

[Thomas_Thumb]

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@Anonymous wrote:

So do they treat mortgages and installment loans the same?

That would seem so weird... everytime I bought a house, my credit rating would plummit.. B/L of 100% for 10 years :-)
 - See below, Fico 08 credit scores would likely not plummet particularly if you had no open installment loans prior to the mortgage

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A mortgage is an installment loan and the open loans are looked at in aggregate for scoring of the B/L factor. There are differing opinions on whether aggregate B/L threshold % may differ if a mortgage is part of the mix.

Not sure what B/L of 100% for 10 years means. I speculate that may mean you just took out a new 10 year loan where you have not yet made any payments, thus remaining balance is the same as the loan amount so 100%. As soon as you make any payments the balance will be less than the loan so B/L < 100%..

Some thresholds that have been discussed for mortgage B/L are 90% and 70% for potentail point gains. So, if you have a $200k mortgage loan with $50k balance and get a new $100k mortgage on a 2nd property, your score may not change

1) Initial B/L = 50/200 = 25%

2) New B/L = (50 + 100)/(200 + 100) = 50%

If you have no installment loans that are open and get a mortgage score may drop some but it will not plummet? Fico 08 in theory "penalizes" those who have no open installment loans on file. This penality may be around 30 points. If you are in this situation and get a mortgage that penalty goes away but is replaced by a high B/L ratio penalty. So score could be neutral or may drop slightly before/after the mortgage. Now, as B/L is reduced below milestone thresholds Fico 08 score increases.

On the flip side, if you have a small open loan that is mostly paid off (say $1000 share secured loan paid dorn to $50 => 5% B/L) you don't have the no loan penalty and you have received maximum points for having an ultra low B/L ratio. Unfortunately, if you get a new $200k loan in this situation, your Fico 08 score could drop around 30 points. Why? Because B/L went up from 5% to 99.5% so all points lost that related to low B/L.

[Anonymous]

Basically, most Home costs around here are in the 500K - 1M range.  
so buying a new home results typically with a new 30 year mortgage of 400K. 
After 10 years the principal may have only dropped by 10% leaving a 90% B/L after 10 years...
So, getting a Mortgage would seem to kill your credit rating for a long period of time..

In my mind this would indicate that strategy for buying a home would be:
- Get the largest loan you can with the smallest down payment you can.
- pay off a big chunk after setting up the loan with all that cash you would have normally applied as a down payment....

Still seems wierd, but I understand more or less.. and in my case, I think it's mostly just timing.

--marcel

[iv]

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@Anonymous wrote:

Basically, most Home costs around here are in the 500K - 1M range.  
so buying a new home results typically with a new 30 year mortgage of 400K. 
After 10 years the principal may have only dropped by 10% leaving a 90% B/L after 10 years...
So, getting a Mortgage would seem to kill your credit rating for a long period of time..

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You'd have to have an APR on that loan of 9.25% to only have paid off 10% after 10 years!

At a more reasonable current rate of, say, 3.75% - you'll have paid off just under 22% after 10 years.

And no, having a mortgage definitely doesn't kill your credit rating for years.

Quite the opposite, even while it's still close to 100%... close-to-perfect scores are possible, even in the first year after opening a mortgage loan.

Yes, B/L ratio is a scoring factor... but it's not a massive score-killer.