Profile picture for user8135786

Which option would you recommend?

My wife and I are looking to get a conventional loan for around 160-180k (do not want to do FHA). Our debt-to-income ratios and income look good. My question is this:

We have about 22k saved. Our credit scores are both in the 630 range. We have no lates/no bankruptcies/no collections/no judgements. Our scores are so low because we have about $9k in balances on about $10k in credit card limits, so the balance to credit limit is killing our score. Would it be better to use the full 20k on a down payment to get a 10% down conventional loan, or use $9k of that savings to pay off all our credit cards, which would raise our credit score, and then use the remaining $12k to do a 5% down conventional loan?

For a rough estimation, the credit monitoring site I use estimates paying off all our credit cards would raise our scores from the 630 range to the 680-690 range within 30-60 days (once all the banks report them as zero balance).

Thanks in advance for your input.
  • February 23 2014 - Cincinnati
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Answers (8)

Profile picture for Dan Tabit
It's easy to say do X or Y, but in reality, I would want more information than you should post on a site like this to say which would be best.  Paying down balances to 1/3 or less will improve your scores, but it may not reflect in your scores for a few months.  Each agency updates at randomly and not necessarily in real time.
I would want to consider what the payment and rate differences would be for a specific amount borrowed.  Are there homes out there in the price range you could currently qualify for that you like or do you need the additional room in your DTI that paying off the balances would provide. 
Could you either sell something or take a second job for a short term just to get out of debt and keep your cash? 
Discuss this with a good lender and work up some strategies.  I did this for my clients when I was a licensed lender and it really helped bring the picture into better focus. 
  • February 24 2014
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Profile picture for gator70
Some consumer credit companies can loan money on installment plans. Then pay down credit card balances. Even though you trade debt, the FICO can jump. 
  • February 23 2014
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As others have mentioned, using funds to pay down credit card debt to increase credit score would be a better option. However, be careful about paying account(s) in full since that could have a less positive impact on your scores vs keeping several hundred dollars balance(s). When you contact a lender to discuss a pre approval letter, have them run a "what if " simulator after running your credit score.  This will tell lender what would be ideal amount to lower each credit card balance to gain maximum credit score increase. It will likely show keeping balance between 25-30% would be ideal against vs paying off completely. You did not mention qualifying income so I will assume you qualify without lowering monthly credit card debt . That is another area lender would need to consider because if paying down credit card(s)  debt to qualify applies it would require paying card(s) balance off and closing account.
Find an experienced local loan officer to assist you with pre approval and maximize increasing credit scores.
  • February 23 2014
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Profile picture for user8135786
These responses confirm what I was thinking. Thank you all for your recommendations.
  • February 23 2014
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Pay down the debt first, your interest rate and mortgage insurance rates will improve with the higher credit scores, which will save you much in the long run.  We are located in Ohio and I would be happy to answer any further questions through my profile.  Thanks!
  • February 23 2014
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Assuming you want a 30 year loan, planning a 5% down payment and using the excess to payoff credit card debts before you apply would be sensible both from a budgeting standpoint and to qualify for better terms on the purchase financing.
  • February 23 2014
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Pay off the high interest Credit Card debt then shop for a loan you can live with  - be sure to ask about USDA loans
  • February 23 2014
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Why are you borrowing $9,000 from credit card companies?
  • February 23 2014
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