Hello all,

My partner and I are looking into the mortgage pre-approval process.

I only have about $3,000.00 left on my student loans.

I do not have any other debt, outside of about $1500 revolving credit card debt that is paid off monthly. -credit score is currently 798.

My concern is that paying off my only “long-term debt” before pre-approval will ding my credit score?

Any thoughts?

With a 798 credit score, I'd recommend a conventional mortgage.

Fannie Mae (Conventional backer) has a rule regarding student loans.

If it doesn't report a payment on the credit report, they're required to use a placeholder of 1% of the balance to count against your debt to income ratio.

If that's the case, they'd only count $30/mth against the ratio.

Which is almost negligible.

But let's say you have a minimum payment that actually does report on credit.

If you have less than 10 months remaining, the debt won't affect your debt to income ratio.

But if you have more than 10 months remaining, and a large payment, like $200/month it's possible that this debt could affect your approval. (this person has $0 other debt, so probably not in his case)

The affect on credit

This person is wondering what kind of ding on credit he would experience if he were to pay off the debt.

When you pay off the debt, it closes the account. It's not like paying off a credit card, because the credit card stays active and open. The student account closes.

If the student loan has been on credit for a while, then closing it out will lower his credit score.

Length of credit history has a 15% weight on your credit score. It's not the biggest impact, but paying it off will hurt credit a little bit.

here are some options

• If you have the money to pay it off, and don't want it counted against your DTI (debt to income ratio) then tell your loan officer that you'd like to pay the debt off at closing. This is the win-win. You pay it off, your credit won't get dinged, and it won't count against your debt to income ratio.
• Wait until after your mortgage closes. If your debt to income ratio is in a fine place, even with the student loan debt, then just wait.
• Pay it off now and risk a lower credit score. Your credit pull (full hard tri-merge credit report) is good for 90-120 days depending on the lender. So if you don't find a house before then, you'll need another credit pull, and if your score has lowered between then, you may receive an adjusted interest rate. (this depends on how far the score lowers)

I like the second option the most. But if your debt to income ratio is affecting your approval, then just have it scheduled to be paid off at closing (option 1).

Here's a separate post I've done regarding how student loans impact your mortgage approval.