paying off loan prior to mortgage

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
stingrey
Posts: 2
Joined: Wed Oct 04, 2017 11:39 am

paying off loan prior to mortgage

Post by stingrey »

Planning on buying a house in the next 6 months and just got a big bonus from work, enough to pay off my remaining student loan and car. Does it net help or hurt my credit/interest rate if I pay off the remainder of my loans? I know closing an account hurts but paying it off will help my debt/income ratio.

Some specific details:
student loan $20k remaining
car $15k remaining
income $400k
credit score currently ~800

Any advice on if I should just pay it off or wait until after I've made my home purchase? Am I overthinking this and it won't affect my mortgage rate that much? Thanks in advance
Johnny Thinwallet
Posts: 142
Joined: Wed Nov 21, 2012 6:07 pm

Re: paying off loan prior to mortgage

Post by Johnny Thinwallet »

Pay them all off.
sixty40
Posts: 288
Joined: Sat Dec 06, 2014 11:53 am

Re: paying off loan prior to mortgage

Post by sixty40 »

Yes pay them off, and it would be easy with your income. I have no mortgage, no car payments, pay off credit card each month, no debt and my credit score is about 800. I don't think paying off debts would affect your credit score, but not an expert on it. One thing that has slightly lowered my credit score was when I closed a couple credit cards (that I did not use), my % of credit used went up relative to my total credit. I think (Clark Howard says) for optimal credit rating you need to keep your credit card use to 10% of total credit, but don't quote me.
Ddd7651
Posts: 120
Joined: Tue May 07, 2019 2:15 pm

Re: paying off loan prior to mortgage

Post by Ddd7651 »

I am an advocate for having no credit score versus a low credit score. I also think you should pay off your house with a low interest rate versus keeping the money invested and probably earning more.

HOWEVER, If you pay off your car loan and your student loans, those accounts will close and you will screw yourself a little when getting a mortgage. It is better to have no credit score for manual underwriting than a lower credit score. Paying them off won't drastically lower it but it will some and could affect your rate depending on where it is. Since we are only talking about 6 months, I would pay them off the moment you close and are able to. Again, this is only because of this 6 month window you are working with. Otherwise, I would say pay it off immediately.

Edit: I re-read and saw your credit score is 800. If you pay them off and they close, it will drop below 800 since you are on that line. It won't be much but having an 8 instead of a 7 visible when getting a mortgage might make a difference.
TropikThunder
Posts: 2544
Joined: Sun Apr 03, 2016 5:41 pm

Re: paying off loan prior to mortgage

Post by TropikThunder »

stingrey wrote: Fri Sep 27, 2019 1:38 pm Planning on buying a house in the next 6 months and just got a big bonus from work, enough to pay off my remaining student loan and car. Does it net help or hurt my credit/interest rate if I pay off the remainder of my loans? I know closing an account hurts but paying it off will help my debt/income ratio.

Some specific details:
student loan $20k remaining
car $15k remaining
income $400k
credit score currently ~800

Any advice on if I should just pay it off or wait until after I've made my home purchase? Am I overthinking this and it won't affect my mortgage rate that much? Thanks in advance
DTI is simply a yes/no qualifier. As long as your DTI is below the cutoff, then you qualify (i.e., it's a conforming loan). If it's above, you don't. Period. For example, the DTI limit for Fannie Mae is 50% when the lender uses Desktop Underwriter, vs 45% (in some cases) for manually overwritten loans. My 45% DTI will get just as good a rate as your 15% all else being equal (made up numbers).

N=1, but here's what I did before my refi (just closed two days ago). I decided to pay off my car right before I decided to refinance, and submitted an app (and had credit pulled) before my statement had closed so my credit report did not reflect the paid off account. Credit report said $387/mo, I said $0 now, sent them confirmation of the payment, and they excluded it from my DTI. Definitely not planned that way, but I ended up with the best of both worlds: my DTI was lower because of the payoff but my score had not re-calculated with the closed account. That said, once all the dust settled my score had dropped all of 3 points (782 to 779) reflecting the closed account and the new credit inquiry.
Ddd7651 wrote: Fri Sep 27, 2019 2:14 pm Edit: I re-read and saw your credit score is 800. If you pay them off and they close, it will drop below 800 since you are on that line. It won't be much but having an 8 instead of a 7 visible when getting a mortgage might make a difference.
Won't make any difference at all unless it somehow plunges below 740. Rates don't get any better once your score reaches 740.
Post Reply