Having current installment loan helps get better mortgage rate ?

[Scallywag]

I am told that you qualify for a better mortgage interest rate if your credit report shows that you have other installment loans (such as car notes) that you are currently paying regularly on (accounts in good standing) !

Is it true that you won't get good rates if you have no other installment loans that you're paying on when you're applying for a mortgage even if you've previously paid off two or three other car notes ? This logic doesn't even make any sense to me and we could do with some advice as we currently have a car note that I want to get paid off around June / July, 2019 (and free up that amount to add to the down payment / mortgage, eventually).

For reference, this is our third car note and we've paid off the other two notes in 2003 and 2015, respectively. Our credit is in the 700 neighborhood because we have made a stoooooooooooopid housing mistake before.

Please help ?!

[kork13]

Some banks that operate solely on credit scores/reports may hit you based on what your credit says. But there are plenty of places that will underwrite a competitive loan with only limited regard for what your credit report says. I've heard this referred to as "manual underwriting", and you can zero in on banks/credit unions that will do that for you (just ask).

On my current home's mortgage, I felt like I was back to getting my security clearance all over again!! It's an old-school credit union that does everything using tried-and-true, low-risk methods, which means they check absolutely everything (current/historical income, current/previous employment, previous housing, utility payment history, and more questions than I can even begin to remember. Your credit history is only one small part of the consideration. In this case, we were actually (somehow) able to secure a rate BELOW market rates (we got a 15yr fixed at 2.375% with no points, in Sep'16, when the going rate was around 2.75% with .5 points).... I was shocked when I saw it at closing, but happily signed the paperwork -- knowing that was our rate, I figured that there were some points tacked on... but nope!

Bottom line: Don't worry so much about polishing your credit history, and DEFINITELY don't just take out a random installment loan just as a strategy for improving your credit. That would be the very definition of insanity. As long as you have a strong financial foundation, you can still qualify for a good mortgage rate no problem.

[Scallywag]

Thank you.

We have done some really stupid things with respect to housing in the past and paid our Stupid Tax. We have since cleaned up after ourselves and we each have two credit cards and the car loan. I really want to get rid of the car loan once we've saved up a decent sized emergency fund (thinking that might be possible around June or July) and put that car payment towards our down payment (we have very little DP saved up, right now). We don't want to pay PMI but may not have that option as homes here cost a kidney and a lung, so we may only be able to put down a paltry 10%. I really worry about interest rates because that will also make a huge impact on affordability.

So a smaller loan, a good interest rate, and a larger down payment will mean a world of difference here and I initially intended to use that lump sum towards closing costs. However, given our past mistakes, I worry that closing the car loan just before buying a home might ding our credit as we would then "only" have credit cards open, and no other installment loans ! This system is rigged if people with more debt get higher credit rating than those who do the financially smart thing and get rid of debt -- instead we're actually punished for it !!

[MonkeyMama]

I am told that you qualify for a better mortgage interest rate if your credit report shows that you have other installment loans (such as car notes) that you are currently paying regularly on (accounts in good standing) !

Is it true that you won't get good rates if you have no other installment loans that you're paying on when you're applying for a mortgage even if you've previously paid off two or three other car notes ? This logic doesn't even make any sense to me and we could do with some advice as we currently have a car note that I want to get paid off around June / July, 2019 (and free up that amount to add to the down payment / mortgage, eventually).

No, that is not true at all. Is a myth perpetuated by lenders, to get people to borrow money (people who otherwise wouldn't borrow).

Good credit stays on your credit report for 10 years, and is reflected in your credit score. So if you have 2-3 previous car notes plus the current loan, will do as much for your credit score. It doesn't matter if it's been paid off or not. & the good news is that bad credit falls off your credit report faster, so won't ding you as long as good credit will help you.

If you had no mortgage, car loans, or installments loans whatsoever for 10+ years, then your credit score would fall.

We've literally never had any loans but credit cards paid off monthly, and a mortgage. This is all you need for a 800+ credit score. You don't have the mortgage right now, but just keep paying off your debts and making the payments on time, and your score will continue to improve.

P.S. Once you hit 720 or 750, you will peak as far as the best mortgage interest rate you can get. There's no benefit to having a higher score than that.

[disneysteve]

I agree that this is false info. You do not need to borrow money just to be able to borrow more money. And you should never intentionally delay repaying a loan in an effort to improve your credit score.

Look, my wife and I have almost no debt. We owe less than 16K on our mortgage and that's it. But we have perfect - and I mean LITERALLY perfect - credit. We both have 850 FICO scores, the highest they can be. I guarantee you I could apply for and get any loan I could possibly want with no problem any time.

Do all of the right things and your credit score will rise over time just fine.

[bjl584]

No.
It's been a few years since I applied for a mortgage, but I do remember the lender being rather impressed and happy that I didn't have many outstanding loans.

[scfr]

When we paid off our mortgage, our credit score took an immediate hit. Then it recovered, but never to the point it was pre-mortgage-payoff because the only credit we now have are CCs that are paid off every month. We're at around 800 and that's probably where we are going to stick, because we like being debt-free.

I wouldn't suggest keeping the car loan just to improve your credit score, because as you said the money you are now using to pay off the car loan can go to upping your down payment $. My suggestion would be to not pay off the car loan within a very short time frame before applying for the mortgage. Allow some time --- personal finance is an endurance sport --- for your score to rebound.

[Scallywag]

Thank you. We will likely have a year - we plan to pay off the car this Summer and won't have a decent DP until the Summer of 2020. Would this be enough time for our scores to recover ?