Credit and home buying wizards please enter

Rct851

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I'm planning to visit a mortgage broker in the next few months to see where I stand in buyin a house. I have what I understand is average credit and my only debt is 6k on the mustang which is running about $300 a month. I can pay the balance of the auto loan without affecting my 20% down payment on the house.

would I be better continuing the car payments to help building my credit score or would I be better off being able to show that even with my average credit I have 20% down and no debt?

I'm looking for the best chance of approval with the best rate possible.
 
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Torch10th

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First, understand that there are different types of credit. The score you pull when going to an auto dealer for instance will be wildly different that the score that is pulled if you're attempting to buy a house. In most cases, you can expect your score to be 30-50 points less in this situation.

It doesn't hurt to go see, you just get a hard pull on your credit history, but that shouldn't be an issue unless you've been shopping a lot of other loans and have multiple hard inquiries. That'll tell you where your credit is really standing and you should get a pre-approval on what the banks "say" you can afford.

It's going to be a bit different for everyone, but in general I hear 3x annual income as your purchase threshhold. In some areas of the county, that's not realistic. The point is you don't want to make yourself house poor anymore than you want to make yourself car poor.

When you're budgeting for this, there's a lot of expenses you don't think about as a non-home owner. Things like maintenance, decor, furnishing, yard etc. When my wife and I built our house in 2014, on top of closing costs and down payment we had an additional 15,000 just to get the house furnished, curtains, decorated and put the yard in. We have about $1500.00 in upkeep costs each year on top of that, but we have a new home, so I would expect that to grow as it ages.

If you can do the house and the car payment at the same time without being strapped, I would not pay off the car. You're going to need that extra liquid cash to get yourself setup and have a safety net.
 

Rct851

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Thanks for the advice. I was leaning that way, the interest on the loan is $11 a month so I'm not giving too much money away. Transunion and equifax are both high 720s but my fico was 660 a few months ago. Just trying to make sure I do t have a hard credit pull for nothing like a did a few months ago when I had one of those days I was really angry at the mustang and was going to kick that bitch to the curb... I know y'all been there
 
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DKS2814V

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A lot of variables to consider when planning for a house, in my opinion. I am going through the same situation now...

What is the interest rate on your car loan? I agree with Torchd in that you'll need some liquid funds for closing, MX and overall upkeep, furniture, etc. However, in my opinion (albeit no financial guru), if the IRs are low enough on that loan, keep the loan and stay flexible with your liquid funds. For example, my loan on my F150 is 1.9% and I owe $3,500 left on it. This could easily be paid off, but in the event I need that money NOW (higher DP, emergencies, all the stuff I mentioned earlier), I want to have it. With that said, I paid off a credit card because I could which had something like a 10% interest rate.

All that being said, the way my mortgage broker discussed it with me is they are also looking at a debt/income ratio (in addition to your credit). Your debt should be between .37 and .40 of your income (or less, and it may vary in specific areas of the country). Take all your debts: car, credit card minimum monthly payment, and other fixed monthly debt/commitments and divide that by your income. If it's in that range, your mortgage broker could qualify you for a specific amount. If you're "living too close to the edge" with higher debts....your likelihood of a good mortgage with good rates is slim.

I am in the same position as you. If I pay off my truck, my debt-income ratio is wildly low ($670/month for the truck payment) and that looks better for me. Downside is $3,500 out of my pocket towards the house in some form or fashion. Additionally, I paid the CC off purely because of the IR, as the minimum monthly payment was trivial ($40/month) and would have unlikely done any "damage" to my debt/income ratio.

I'm in the Houston area as well, so if you want to chat with my broker (she's a good friend of mine), who works for Wells Fargo, let me know. She's helped me tremendously. There are quite a few things you can do to help, if this is your first time buying a home. She's hooked me up with a class to take that gets me 1/8% off the interest rate. Also advised based on a potential 1-time withdrawal from my Roth account (predicated it doesn't hurt my long-term retirement goals), that can go towards your downpayment/closing, etc. I think any mortgage broker should do this, but I'm not experienced enough to know what other kind of help they can provide.

...obviously a rookie in this realm, so I'm sure some others can correct me where I'm wrong and offer good advice as well.


I have utilized these sites in the past. I didn't know how much I qualified for and where those mortgage jokers were getting their information.
http://www.bankrate.com/finance/mortgages/why-debt-to-income-matters-in-mortgages-1.aspx
http://www.timevalue.com/products/tcalc-financial-calculators/mortgage-qualification-calculator.aspx
 
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rotor_powerd

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I'm planning to visit a mortgage broker in the next few months to see where I stand in buyin a house. I have what I understand is average credit and my only debt is 6k on the mustang which is running about $300 a month. I can pay the balance of the auto loan without affecting my 20% down payment on the house.

would I be better continuing the car payments to help building my credit score or would I be better off being able to show that even with my average credit I have 20% down and no debt?

I'm looking for the best chance of approval with the best rate possible.

In general you're allowed 28% of your gross monthly for a mortgage payment (Includes taxes, insurance, PMI if applicable), and 36% of gross monthly for all debt payments.

Example - If you gross $10,000/mo, you are allowed a mortgage payment of up to $2,800 and total debts of up to $3,600/mo.

Figure up your numbers and see if paying the car note off is necessary or not to get you under that 36% number. If not then I'd just keep the cash on hand.
 

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I have to disagree some.

Having average credit will hinder you, by that I mean you need to have an average of 700 across all three bureaus. What sucks is they use FICO model 8 instead of model 5. Model 5 is for car loans, etc and the one you can see on sites like Experian.com. To my knowledge there is no source for you to check your model 8 score, other than having a lender pull it. This is a big pain in the ass if you're on the border. I buy everything cash, and my model 5 FICO average was 743, but model 8 was 702 because it puts more weight on your loan history, which I had none.

With this I would absolutely pay the car off, as that $300/month goes against your debt to income, and that get's scrutinized heavily. I got my credit card reporting dates down to an exact science. I never carry a balance, but sometimes I'll fuel up or something the day after I pay the bill and the day it reports to your credit is a few days after the statement day (about 6 days). So sometimes it will report to my credit I have an $80 balance or whatever, which is never a big deal until you're in the loan process. Your credit will get pulled 2-4 times through the loan process to make sure no surprises pop up before closing. You can always ask the lender if you should pay it off, but 99% of the time they will tell you if you can, clear any debt.

Then there's lenders.
Many lenders suck, especially if you're in a hot market, like Houston. I went through a few for a few different reasons. My main issue are the ones who put you on the back burner if you're not doing a $500k or more loan since they make more off those. Had a couple that would take weeks to get back to me with simple info. The market I'm in is overheated and bidding wars on everything, so a slow lender could potentially screw me on a sale.

The other thing to be aware of is the lender guidelines. There's the standard guidelines that they all follow, but then some have their own overlays/restrictions. Being I was going from an investment angle and wasn't going to be my sole purchase for a long time, I ran into this a few times where they would feed me their BS overlays as the actual lending practices. Actually got into an argument with one, and proceeded to read off the guidelines line by line to him. At that point told me "well that's not how we do it", then hung up on me. Treat them like car salesman, and check everything you're told as it will save grief and more importantly money.

Many lenders and realtors work together a lot, and can usually get a referral for one from the other. I found my lender through my agent actually, since there are few investment agents up here. If you can find those who work together closely it simplifies things during the contract and offer process, plus you might save some money. I had my fees cut, because my agent had done over 100 deals with the lender, so she cut him a break on some of the cost. Just like lenders, interview your agent too, to make sure it's a good fit.

Hopefully that helps, and I'm going to pm you my lender contact, their base is out of Houston so she can likely get you set up with a lender down there. She was way better than any other lender I ran across, was quick to reply to things, no nonsense, and very to the point.
 

Rct851

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Car loan was 1.9% through jsc. I had very little credit history at the time and not all good after some student loan payment mishaps (****ing oops), but I put 30% down. Good info about a class to help lower the interest a little. I'll ask the broker about that and if we end up not seeing eye to eye I'll send a message for your brokers info.

from all the reading I've done and the price range I'm looking at I'm assuming it's not a matter of approval (I hope) but more so an interest rate that I feel reflects my down payment, debt to income and general low risk to lenders. I guess something about unloading 50k has me nervous lol
 

DKS2814V

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Car loan was 1.9% through jsc. I had very little credit history at the time and not all good after some student loan payment mishaps (****ing oops), but I put 30% down. Good info about a class to help lower the interest a little. I'll ask the broker about that and if we end up not seeing eye to eye I'll send a message for your brokers info.

from all the reading I've done and the price range I'm looking at I'm assuming it's not a matter of approval (I hope) but more so an interest rate that I feel reflects my down payment, debt to income and general low risk to lenders. I guess something about unloading 50k has me nervous lol

I hear you. Not technically unloading it, as the market in Houston has been relatively stable for some time...that money is just now being held in the form of a roof over your head. However, I've always been told and brought up with the train of thought that: A home is likely your biggest liability, and not an investment like they are typically intended.

Where are you looking in Houston?
 

Rct851

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Around clear lake, league city, el lago, seabrook. And I agree if I make money on the house then great it if not it's better then the $1000+ a month stupid apt prices... Plus I hear a 4 post in in your apt garage is frowned upon
 

MG0h3

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Are you looking at new construction or an older home? Typically new construction has a preferred lender and theyll pay all the closing costs and throw some other stuff in.

Like some other guys said, dont buy too much house. Im on my 4th house, its the smallest, and by far I like it the most.

Just do whatever you can to avoid PMI. If there are still programs for first time buyers where you can do 3-5% down and avoid PMI while having a payment your are comfortable with, do it.

I wouldnt worry about paying the car off, itll take a bit for that to reflect in your credit score and at only paying 11 a month in interest, that loan isnt costing you anything.
 

BlueSnake01

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Having average credit will hinder you, by that I mean you need to have an average of 700 across all three bureaus. What sucks is they use FICO model 8 instead of model 5. Model 5 is for car loans, etc and the one you can see on sites like Experian.com. To my knowledge there is no source for you to check your model 8 score, other than having a lender pull it. This is a big pain in the ass if you're on the border. I buy everything cash, and my model 5 FICO average was 743, but model 8 was 702 because it puts more weight on your loan history, which I had none.
My BofA CC and Citi Bank Double Cash Card give me a transunion FICO 8 score once every month. I thought home lenders rely on the older FICO scores and not the newest one’s? Model 8 came out in 09 I believe.

OP, the only thing I noticed after paying off a car was my score dropping. Not a big drop but nonetheless a drop. Happened to me everytime I paid off a car and was reported being closed.
 

DKS2814V

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Are you looking at new construction or an older home? Typically new construction has a preferred lender and theyll pay all the closing costs and throw some other stuff in.

Like some other guys said, dont buy too much house. Im on my 4th house, its the smallest, and by far I like it the most.

Just do whatever you can to avoid PMI. If there are still programs for first time buyers where you can do 3-5% down and avoid PMI while having a payment your are comfortable with, do it.

I wouldnt worry about paying the car off, itll take a bit for that to reflect in your credit score and at only paying 11 a month in interest, that loan isnt costing you anything.

With regard to PMI, I am being educated/directed differently. ....and in all fairness, my situation might be different. However, take this for example.

A $400k loan with 10% down (roughly $55k up front payment) incurs a PMI, per month, cost of $60. If I put down 20% (roughly $95k total up front payment on a 400k home), it would take 650 months to "recoup" that additional $40k in down payment with PMI costs. It isn't as simple as "just avoid PMI" as I've been told...and I'm even being recommended by my broker to go with 10-15% down, accept PMI, and move on. Doing an 80-15-5 also is frequently more expensive than accepting PMI due to higher interest rates for those 15 and 5 loans.

In my case, the PMI is something I'm going to probably accept as I plan on living in my new home for 5-6yrs then turning it into a rent house and utilizing the equity, other 5-10% that I don't put down on my first house, and future savings to purchase another home to live in longer term.
 

MG0h3

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Thats some pretty low PMI. You sure that number is accurate? I have PMI on one property and its double that on half the loan balance you are talking about.

And I wouldnt trust your broker. His goal is to cost you as much as possible. Probably gets a bonus for sticking you with PMI.

Additionally, you arent losing the money by putting extra down to avoid it. Its equity and "in the bank", as long as values dont tank of course.
 

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So, with regard to PMI, it is about 100 bucks a month until the balance of the 20% down payment is paid off.

Your credit won't go up immediately after you pay your car off, in fact, it may drop a few points. Our loaner did not look at our current debt as a way to disapprove our loan. They looked at available funds, payment/credit history, etc. We were approved for up to $250,000 based on near 800 FICO scores, two car payments over $1,000 total and an annual income of about 100K a year between my wife and I. Just an example on how that could work.

Right now, APR''s are fluctuation. We got locked in to a 3.25 % APR for our mortgage. Some people have made claims they are getting percentages in the 2's, which is total BS if you ask me.

The only thing they say is during the entire process of when your credit is run, NOT to make ANY large purchase over a few hundred bucks as they track those and will ask questions. Those things WILL effect your approval process, I.E. buying a car, new TV, etc.
 

BlueSnake01

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Thats some pretty low PMI. You sure that number is accurate? I have PMI on one property and its double that on half the loan balance you are talking about.

And I wouldnt trust your broker. His goal is to cost you as much as possible. Probably gets a bonus for sticking you with PMI.

Additionally, you arent losing the money by putting extra down to avoid it. Its equity and "in the bank", as long as values dont tank of course.
I went thru the FHA 3% route and my PMI is over $200!! My FICO score at the time was in the high 600’s so it wasnt the best nor the worst. Had to wait almost 3 years paying almost 10K in PMI alone but house now has more than enough equity to get a conventional loan and save myself some nice change. Wish I would’ve given more a downpayment and up’d my score and waited but feel I did a good decision jumping on it considering the houses went up almost 150k in those 2-3 years for pretty much the same house I have and area.
 

DKS2814V

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Thats some pretty low PMI. You sure that number is accurate? I have PMI on one property and its double that on half the loan balance you are talking about.

And I wouldnt trust your broker. His goal is to cost you as much as possible. Probably gets a bonus for sticking you with PMI.

Additionally, you arent losing the money by putting extra down to avoid it. Its equity and "in the bank", as long as values dont tank of course.

$57 for 15yr, $90 for 30yr.

I would tend to agree with you on the mortgage broker deal typically, but I think if you find a good one that knows your long-term plan, and you trust, it could work out. Time will tell in this case!
 

DKS2814V

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The only thing they say is during the entire process of when your credit is run, NOT to make ANY large purchase over a few hundred bucks as they track those and will ask questions. Those things WILL effect your approval process, I.E. buying a car, new TV, etc.

Funny you say this as mine said: "Don't make any stupid purchases within the next 6 months, please..."

Two bachelor parties, a wedding, and a Mt. Rainer summit trip planned for spend, I think I might be raising some eyebrows.
 

Screw-Rice

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My BofA CC and Citi Bank Double Cash Card give me a transunion FICO 8 score once every month. I thought home lenders rely on the older FICO scores and not the newest one’s? Model 8 came out in 09 I believe.

OP, the only thing I noticed after paying off a car was my score dropping. Not a big drop but nonetheless a drop. Happened to me everytime I paid off a car and was reported being closed.
You're completely right, I switched the two. Common is model 8, home loan is model 5.

With regard to PMI, I am being educated/directed differently. ....and in all fairness, my situation might be different. However, take this for example.

A $400k loan with 10% down (roughly $55k up front payment) incurs a PMI, per month, cost of $60. If I put down 20% (roughly $95k total up front payment on a 400k home), it would take 650 months to "recoup" that additional $40k in down payment with PMI costs. It isn't as simple as "just avoid PMI" as I've been told...and I'm even being recommended by my broker to go with 10-15% down, accept PMI, and move on. Doing an 80-15-5 also is frequently more expensive than accepting PMI due to higher interest rates for those 15 and 5 loans.

In my case, the PMI is something I'm going to probably accept as I plan on living in my new home for 5-6yrs then turning it into a rent house and utilizing the equity, other 5-10% that I don't put down on my first house, and future savings to purchase another home to live in longer term.
There are conventional loans where you can forego PMI for a slightly higher interest rate if doing less than 20%. Which is the preferred route, you can deduct interest off your house, you can't deduct PMI.
 

MG0h3

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$57 for 15yr, $90 for 30yr.

I would tend to agree with you on the mortgage broker deal typically, but I think if you find a good one that knows your long-term plan, and you trust, it could work out. Time will tell in this case!

Just confirm with your guy. It might be 57/90 per 100k in loan. You're numbers just don't sound right but maybe there are some new loan pmi rules
 

DKS2814V

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Just confirm with your guy. It might be 57/90 per 100k in loan. You're numbers just don't sound right but maybe there are some new loan pmi rules

Definitely going to look into it since you see something completely different. My cost illustration that she sent me for each scenario just has an itemized monthly cost, then the whole amortized table deal.... Crazy all the costs that go into this biz!
 

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