Question re: mortgage scores and best step moving forward

[Anonymous]

Hello! This is my favorite area of the forums to hang out in and glean knowledge from. Y’all all superstars.

Some background: I had paid two student loans down in the hopes that the very minimal balances would be enough to keep them open, but the payments were pushed out far enough that I had no worries. Navient forgave my remaining balances (under $50 on each loan), subsequently closing these loans, much to my dismay. I now have no open installment loans.

I have taken a fair hit to my Fico 8 scores across the board, but my mortgage scores got a little boost and stayed there. Mid score hovering at 683. As I started my rebuild in the low 400s (Fico 8, not sure what mortgage scores were then), I am happy with this. I qualify with the lender I want to use; right now, that is enough for me.

My youngest accounts are all set to turn 1 year old by March, when I hope to prequalify and attain a mortgage. My question is re: lack of any installment loans on my report. Should I try to get one now and pay it down below 8.9%? Will the benefits of having an installment in the mix outweigh the hit my AOYA and AAoA will take? These questions are specific to the mortgage ficos...I’m not concerned with anything else right now. Will the lack of installment loans hurt more in 5 months than they do now?

Help! Your guru like input is appreciated.

[Anonymous]

My suggestion would be to not open an installment loan at this time.

Score wise, when your youngest account hits 12 months in age you'll probably see around a 20 point bump to your scores.  If you open an installment loan now, you won't get that bump come March or whenever your AoYA would reach 12 months.  You would likely get a 30 point or so bump from opening a SSL verses not having an open loan.  That being said, come time for your mortgage app you'd be at maybe a net gain of 10 points (+30, -20) if you were to open a loan now.  IMO, those 10 points wouldn't be "worth" it, as you would have opened an account in under 6 months from the time you applied for the mortgage.  This is not something that potential lenders like to see and definitely not worth (say) 10 points IMO.

[Anonymous]

Note what your own experience was.  You went from having loans that were almost paid off to no open loans at all... and your mortgage scores rose a few points.

That should help you answer the question of whether adding more open loans will help your mortgage scores.  The answer is no, right?  Does that make sense?

Indeed, you should expect harm, since in addition to not getting help you will also take a hit to Age of Youngest Account, to your AAoA, to your number of inquiries, etc.

Remember too that a mortgage always involves a manual review.  The underwriters will be able to see that you have a history of having successfully managed and paid off loans.

Would you mind helping us out?  I'd be interested in hearing the original loan amount for each of the student loans, the final balance just before it was forgiven, and the original monthly payment you agreed to make at the start of the loan.  I have been warning people of the risks of loan forgiveness when they pay their loans to ultra-low amounts, but the more concrete case studies we have the better we can recommend strategies to prevent this.

My recommendation has been to make sure your balance is always....

       (a) Greater than $20, and

       (b) Greater than the original monthly payment

[SouthJamaica]

---

@Anonymous wrote:
Hello! This is my favorite area of the forums to hang out in and glean knowledge from. Y’all all superstars.

Some background: I had paid two student loans down in the hopes that the very minimal balances would be enough to keep them open, but the payments were pushed out far enough that I had no worries. Navient forgave my remaining balances (under $50 on each loan), subsequently closing these loans, much to my dismay. I now have no open installment loans.

I have taken a fair hit to my Fico 8 scores across the board, but my mortgage scores got a little boost and stayed there. Mid score hovering at 683. As I started my rebuild in the low 400s (Fico 8, not sure what mortgage scores were then), I am happy with this. I qualify with the lender I want to use; right now, that is enough for me.

My youngest accounts are all set to turn 1 year old by March, when I hope to prequalify and attain a mortgage. My question is re: lack of any installment loans on my report. Should I try to get one now and pay it down below 8.9%? Will the benefits of having an installment in the mix outweigh the hit my AOYA and AAoA will take? These questions are specific to the mortgage ficos...I’m not concerned with anything else right now. Will the lack of installment loans hurt more in 5 months than they do now?

Help! Your guru like input is appreciated.

---

As someone who for the past 3 years has always had either 1 or zero open installment loans, I can tell you what my personal experience has been when adding in the loan and paying it down to 9%:

1. It didn't help my EQ FICO 5 or EX FICO 2 scores at all. Not even 1 point.

2. It did give my TU FICO 4 score a boost, but only about 20-25% as much as I got in FICO 8. I.e., if in FICO 8 I got a 30 point boost, my TU FICO 4 went up maybe 6 to 8 points.

[Anonymous]

Thank you all for weighing in! I have far more time to read than respond, hence the late (but nethertheless profound) gratitude.

The three of you are certainly on my radar because of your vast practical and theoretical knowledge in the credit world; you come up often with insights valuable to whatever my current search terms are.

To answer your question Credit Guy In Dixie, at the start of the year with my rehabilitated loans, I owed approximately $5,600 between two student loans. I shoveled all of my extra funds at this debt. The original monthly payments were $40 each. After getting each loan to under $1000 with payment due dates pushed out to 2022, Navient recalculated my monthly payments to $69 each. I paid each loan down to under $50 due. That is when they forgave the remaining balances, despite the due dates being so far out. My hope was to create a situation where the loans were dismissed as far as dti (so I could qualify for the highest mortgage my income allowed, while reaping the scoring benefits of having a loan user 8.9% as well as paying minimal interest).

This clearly backfired because they closed my loans, but ultimately it still appears that in the score versions that matter to me, I’m not taking any real hit. It helps to know there won’t be a future hit as far as the open loans on any of the mortgage score varieties of Fico (per SouthJamaica’s experience). I was feeling anxious!

[Anonymous]

Thanks so much, Bird.

I am guessing that the forgiveness trigger in your case was paying down the loans to under the monthly payment.  Different loan handlers will have different policies -- it's all internal to them and can vary quite a bit.

I have one student loan that is at $61 with the monthly payment listed at $50.  The $61 balance is less than < 0.5% of the original loan, so individual installment utilization may not be part of the trigger -- the trigger may be a combination of raw dollar value and keeping it at least a couple dollars above the monthly payment.

Though again, the rules are internal and lender-specific and likely to be top secret.