Hi! I am hoping to get a detailed expert answer for my questions. My husband and I are planning on applying for a mortgage soon, but first want to pay down a couple thousand dollars of credit card debt, which we’ll be able to do over the next 2 months or so.
According to some credit score simulators on the credit monitoring sites we use, paying off all or nearly all the debt will really boost our scores, which is ideal when preparing to apply for a mortgage, obviously. But we also have a personal loan (that we’ve always paid on time) that is set to be paid off in 4 months and we’re worried once this loan is paid off, our credit scores will drop and cause an issue with getting a good mortgage rate.
What is our better option to ensuring our credit isn’t negatively affected just before trying to get a mortgage? Paying off the personal loan or refinancing it before it’s set to be paid off to keep that installment loan going and on our credit file?
I know that either way we’re looking at a score drop wither a credit inquiry hit if we do a refi or a hot if that installment loan drops off our credit file. As far as credit mix we have several credit cards between us – some shared, some not, and my husband (he’s the sole income earner) also has student loans, a car loan, and the personal loan in his name…so he would be losing the installment loan as a type of credit account should we pay that off
Please let me know what is the best move to keep our scores as high as they can be as every credit score point will matter when determining our mortgage rate.
̶ Jenn in Illinois
Denny Ceizyk, LendingTree Mortgage Expert, responds…
Hi Jenn,
Kudos to you for taking such a proactive approach toward boosting your credit before applying for a mortgage preapproval. The impact a preapproval can have on your credit score is one of the most frequently asked mortgage questions. Just remember that it’s way more stressful to try fixing credit issues after you’re already under contract to buy a home.
What are your current credit scores? Based on the detail in your question, you’ve spent a lot of time making decisions about credit use, so I would start by checking your scores from the three main credit bureaus: TransUnion, Equifax, and Experian. Lenders pull something called a tri-merge credit report and use the middle of the lowest scoring borrower to quote your rate and approve your loan.
How mortgage lenders assess your credit score
For example, if your scores are 740, 721, and 710 and your husband’s scores are 730, 710, and 690, the lender would use your husband’s 710 score for your rate quote and loan approval. Don’t worry, though; you don’t need an excellent (800 or higher) credit score to get the lowest interest rates. In fact, only 1.2% of Americans’ score is at 850, which is considered perfect. For a conventional loan, a score of 740 or higher – considered very good – will typically get you the most competitive mortgage rate quotes. Rates update daily, so it’s important to check rates often so there are no surprises when it’s time to apply for a loan.
Consider credit utilization first
As far as improving your scores, I agree that paying down your credit card balances can help boost them. Specifically, pay attention to how much revolving credit you’re using as reported by your credit card issuer on your credit report, and compare that to your available credit limits. This is known as your credit utilization ratio. It’s calculated by dividing the amount of revolving credit being used by your maximum credit limit. Ideally, aim to keep your total credit usage below 30% of your available credit line on all of your credit accounts. For example, if you have two credit cards, each with a credit line of $5,000, you have access to a total of $10,000 in revolving credit. Having an unpaid balance of more than $3,000 on each of the two cards might lower your scores.
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How do your loans affect your debt ratio?
You also mentioned your husband is the sole income earner, and he has a mix of student loans, credit cards, and an auto loan. Auto, student, and personal loans are all types of installment loans, so there might not be a big hit to his scores from paying off the personal loan balance. Plus, getting rid of the personal loan payments may help you qualify for more house by reducing your total debt-to-income (DTI) ratio, or a measure of your total monthly debt (including your new mortgage payments) divided by your gross monthly income. Less monthly debt means you’ll have more borrowing power, which may help you qualify for a more expensive home as prices continue to rise in many parts of the country.
Consider options for applying individually versus jointly
If your husband’s scores are significantly higher than yours, consider applying for the home loan in his name alone. You could be a “non-borrowing spouse,” which just means that your credit isn’t used to qualify for the mortgage, but your name (along with your husband’s) is listed on the home’s title. Just make sure the title vesting you choose (typically joint tenancy with rights of survivorship for most married couples) gives you ownership rights to the home in case something happens to your husband. Ask the escrow officer or attorney who’s helping with your closing to recommend the best title vesting options based on your state’s laws.
Take advantage of free weekly reports
Pull your mortgage credit reports sooner rather than later. Many consumers are taking advantage of free weekly access to their credit reports during the coronavirus pandemic. Your question didn’t mention the credit monitoring service you’re using and whether it monitors all three credit bureaus or just one or two. If you focus on boosting your score with just one agency, the other two scores could be lower and result in higher interest rate quotes or tougher approval.
Take advantage of rapid rescoring if you pay off debt
Many mortgage companies offer a “rapid rescore” service. This means you’ll typically provide statements showing recently paid-down balances to your lender who then forwards the information to the credit reporting agency. The rapid rescore process allows the credit reporting agency to work directly with each credit bureau to update your information and produce a new score much faster than if you tried it on your own.
One final caveat: Mortgage credit reports are typically good for up to 120 days. Make sure you limit your credit use and pay all bills on time to avoid any credit score dips if you take more than four months to find a home.
