Question re: Fico score and loan payoff

[dawnm72174]

Hubby and I are planning on applying for a mortgage in a couple months. Right now we have small personal loan and an auto loan, both about 10% paid. Within the next month we are expecting a good sized financial windfall. After putting a nice chunk away for a down payment, I would like to pay off the personal loan and pay the auto down to 30% paid. My question is this: if we follow this plan, would it hurt our scores because we have one less installment loan? I know that any possible hit would be a temporary but I am curious.

For our credit mix we each have 4 revolvers (3 major CCs and a store card) and the two loans mentioned plus old paid off auto loans. My mind is blank on what else we need to optimize our scores other than maintaining <10% utilization.

Anyway, I look forward to reading everyone's opinion about my plan and the possible effect on our scores.

[StartingOver10]

You might get better responses in the Understanding Fico Scoring subforum.  Your question is more difficult than it might first appear.

[dawnm72174]

I spent a good 5 minutes trying to figure out which board to post this question lol

Thank you

Mods, so that I don't double post, could one of y'all please move. Thanks!

[SouthJamaica]

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@dawnm72174 wrote:

Hubby and I are planning on applying for a mortgage in a couple months. Right now we have small personal loan and an auto loan, both about 10% paid. Within the next month we are expecting a good sized financial windfall. After putting a nice chunk away for a down payment, I would like to pay off the personal loan and pay the auto down to 30% paid. My question is this: if we follow this plan, would it hurt our scores because we have one less installment loan? I know that any possible hit would be a temporary but I am curious.

For our credit mix we each have 4 revolvers (3 major CCs and a store card) and the two loans mentioned plus old paid off auto loans. My mind is blank on what else we need to optimize our scores other than maintaining <10% utilization.

Anyway, I look forward to reading everyone's opinion about my plan and the possible effect on our scores.

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That's easy.

1. LOANS: Before the mortgage, don't pay anything down to zero. Pay them down to as small a number as you can above zero, but not zero. There is a lot of evidence that 9% or lower is the best.

2. CARDS: Before the mortgage, keep all but one reporting at zero, and have that one reporting at 9% or less.

These will help you optimize your score going into the mortgage application.

[dawnm72174]

So... pay the personal loan to below 9% and continue keeping our utilization to 9% or lower on one card at statement date.

Gotcha! Thanks Jamaica

[Thomas_Thumb]

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@dawnm72174 wrote:

Hubby and I are planning on applying for a mortgage in a couple months. Right now we have small personal loan and an auto loan, both about 10% paid. Within the next month we are expecting a good sized financial windfall. After putting a nice chunk away for a down payment, I would like to pay off the personal loan and pay the auto down to 30% paid. My question is this: if we follow this plan, would it hurt our scores because we have one less installment loan? I know that any possible hit would be a temporary but I am curious.

For our credit mix we each have 4 revolvers (3 major CCs and a store card) and the two loans mentioned plus old paid off auto loans. My mind is blank on what else we need to optimize our scores other than maintaining <10% utilization.

Anyway, I look forward to reading everyone's opinion about my plan and the possible effect on our scores.

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Your strategy is sound. All you need is one open installment loan on file. Note: installment loans [possibly ex mortgage] are considered in aggregate - not individually. Fico scoring models [except perhaps Fico 04] look at ratio (%) of (aggregate balance on open loans)/(total open original loan amounts).

So, no reason or value to maintain two open loans. Closing the PL and bringing the car loan to under 30% is a good tactic. Getting that car loan to under 10% may buy you a few more Fico 08 points (possibly 10). However, it won't benefit your EQ and TU Fico 04 scores (which are what counts for mortgage applications).

If you are applying for a mortgage, you absolutely do want to only have one revolving credit card report a balance as # open accounts reporting a non zero balance is a significant factor in Fico mortgage scoring. Also, you definiitely do need to keep your aggregate CC utilization under 9% to optimize score. Personally, I think you are fine if the one card you let report is under 30% utilization (as opposed to under 9%) as long as aggregate utilization across all cards is under the 9% threshold.

Please note: Fico 08 scores are not what lenders look at for mortgage decisions. The scores mortgage lenders look at are:

EQ Fico 04 (score 5), TU Fico 04 (score 4) and EX Fico 98 (score 2).

Again - allow a non zero balance to report on only one card (make sure you don't report a balance on zero cards as your score likely will be smacked down 20 to 30 points if you do). You can use cards as needed every month - just pay all charges on every card but one before your monthly statements cut). Of course the simpler approach is to just put charges on one card only for the 2 months prior to applying for a mortgage.

After you lock in a mortgage/rate, feel free to use cards and let balances report in a manner that works for you. [I let balances report naturally and then PIF the statement amounts as a standard practice - not an issue since I am not looking for new credit].

Good luck!

[Revelate]

To add something (go figure) 2/3 of the scores in the mortgage trifecta don't even look at installment utilization.  You can do some installment gimmicks for optimizing your installment utilization for EX if you could get the aggregate of the car loan and personal loan to call it 9% or better, but that's cash which is likely better kept for the mortgage chase.

The big question when we're talking mortgage: do you have room on the DTI calculation for what you want to purchase with your income and factoring in the installment loans?  If you do, then it's not a big deal, if you don't, pay them off so that you can afford the house you want.  Paying off both loans doesn't hurt nearly as badly in mortgage land as it does on the more modern FICO scores (FICO 8 and above) where it's a 25-40 point drop, and that would suck but it's fortunately one thing we don't have to worry about in mortgage UW, yet.

[SouthJamaica]

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@dawnm72174 wrote:
So... pay the personal loan to below 9% and continue keeping our utilization to 9% or lower on one card at statement date.

Gotcha! Thanks Jamaica

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Most welcome dawn

[dawnm72174]

So basically just keep doing what I'm doing with the revolvers and it's ok if I pay off the small loan and a bit of the car loan, as long as we have one installment open. As far as DTI, we should be good at 15%. I can check out mortgage scores next month before apping because our 3B reports update then. They weren't too bad at last update but could definitely be improved for better rates.

We will have 30% down (plus closing costs) so that should help save us money in the long run. This is starting to get real. Oh my goodness lol

Thank you all again for the great advice.

[SouthJamaica]

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@dawnm72174 wrote:

So basically just keep doing what I'm doing with the revolvers and it's ok if I pay off the small loan and a bit of the car loan, as long as we have one installment open. As far as DTI, we should be good at 15%. I can check out mortgage scores next month before apping because our 3B reports update then. They weren't too bad at last update but could definitely be improved for better rates.

We will have 30% down (plus closing costs) so that should help save us money in the long run. This is starting to get real. Oh my goodness lol

Thank you all again for the great advice.

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I'm not an expert like Thomas_Thumb, and he may well be absolutely right that you're ok with one loan still open, but why take the risk? I think it's risky to pay off either loan down to zero this close to your mortgage application. It's certainly not going to help your FICO scores. So why take a chance, even a slim chance, of it hurting them?

Too many nightmarish stories on this board of people's scores dropping precipitously when an installment loan is paid down to zero.