How much of my mortgage do I need to pay off for the FICO "Proportion of loan balances to loan amounts is too high" reason code to disappear?

Question

I have a FICO 8 score that is fluctuating from 810-830 and the only reason code given is:

Proportion of loan balances to loan amounts is too high

The only balance I have from month to month is my mortgage, which is 19.2% paid off, and I've made on-time payments for all 17 months since the start of the loan. The amount remaining on my mortgage is about half of my total available revolving credit.

I've played around with this for a couple of months, ensuring a $0 reported balance on all 7 revolving credit accounts and also with carrying a 1%-5% balance on all accounts, two accounts and four accounts. This code is reflecting specifically on the mortgage account.

I managed to dig up a bit of insight into this code as it specifically pertains to mortgages.

...in general, new loans will always draw up that response, whether it's a reason for decline or not, in regards to a new application for credit. This can be a negative impact towards you since it will appear that you have taken on new debt.

...balance too high in relation to loan amount, in other words, they want to see payment history on that account.

Source: FICO Forums March 29, 2014

It may be that I haven't yet hit some threshold of monthly payments and/or a % LTV ratio, although I would have expected a different code for that.

As for the questions on why I care: I'm just interested, that's all. I've been playing the FICO Score game for so many years that I thought I had it all figured out. I made a spreadsheet that predicts credit scores almost perfectly for revolving accounts, car loans and installment loans using payment history, AAoA, closed accounts, credit mix, the works, but this mortgage issue is the missing piece that my spreadsheet can't predict.

What percentage of my mortgage do I need to pay off (and/or how many consecutive months of payment are needed) for this reason code to go away?

Answer 1

I have a FICO 8 score that is fluctuating from 810-830 and the only reason code given is:

Proportion of loan balances to loan amounts is too high

If that message is the only one you have, and the score you have is more than 800 you have nothing to worry about. The score and message will not stop you from getting other loans or credit cards.

The mortgage is not the only thing impacting your score.

The only balance I have from month to month is my mortgage,

I interpret this as I have no car loans or student loans but I do have credit cards that I pay off every month. The problem is that even if you pay it off every month, the credit card companies still show that you have a balance. For example if you use it to buy groceries every week, and you pay the bill when it is due, when they report the numbers they will still report that you have balance on the card, because of the weeks that have passed between bill and payment.

The only balance I have from month to month is my mortgage, which is 19.2% paid off, and I've made on-time payments for all 17 months since the start of the loan. The amount remaining on my mortgage is about half of my total available revolving credit.

Lets look at some numbers that are implied by that statement. Lets call the 19.2% as 20%. That means you have $80,000 to go on a $100,000 mortgage. But that statement also means that your sum of your lines of credit on your credit cards is $160,000.

The question is what number is being reported by the credit card companies regarding you utilization of the available credit. That percentage could be the thing that is causing the fluctuation of the score. Fox example I have a month each year that my utilization spikes because of a couple of big bills due. I funnel them though the credit card for the points, but the next month my score drops 10 points, and then goes back up a month or two later. Like clockwork. That is the one month of the year I get a utilization warning.

I said before that the 800+ score won't prevent you from getting more loans. But score is only part of the approval process. The question is what amount of debt can you income support.

Answer 2

According to my experience, no amount will fix your issue.

Note that the exact calculation of Fico scores is not public, so anything is a guess.

Your mortgage gets reported with the current total outstanding, and the max the same number; i.e., it is always a '100% used loan'. That will not change, even if you pay it down to $1 - it will be a $1 loan that is fully used. That makes some sense too, as a mortgage does not have a 'credit limit' that you could use to a higher amount - you cannot take more money out at will.
The only way to change the ratio is to have active credit cards that have unused credit on them, and in significant enough amounts to make an impact compared to the mortgage. For example, if your mortgage is 200k, a credit limit on all your cards of 40k is significant, and if you use it to 5%, your ratings will look better.
Note that having credit card limit and not using it is considered 'inactive' and not counted after some months, so you would need to use them abit, wait for the bill, and then pay them off.

You should also consider that at every credit score, the tools report you the biggest reason for it not being higher, even if you have 849 - after all, there is a reason why you don't have 850. That shouldn't mean you need to work on that issue immediately - perfect credit score is not a valuable life goal, at max, it is a means to get a better credit.

Any work to get a credit score higher is only useful if it is below 740, and you plan to get a large loan in the near future, otherwise it's a waste of your time and effort

Answer 3

GREAT answer, @mhoran. To the OP I say to keep in mind that a mortgage is not calculated as part of your "revolving debt", if anything it carries as installment debt, as it has a payoff date (even if it is in the distant future!).

Also, when looking at your credit, some of the models might penalize you if your mortgage represents too high of a multiple to your reported income (i.e., if you owe $100k and earn $50k, the multiple would be 2).

To be fair, NOBODY can explain the inner workings of the credit scoring models. They are kept highly secret so as to prevent people from "gaming" them, although it isn't hard to draw inferences (and perhaps some darned good accurate guesses) from watching how scores rise and fall in order to understand the general logic driving the scoring mechanisms. To answer your question directly, I don't know of any way to give you a concrete number ($ or %) simply because the models deliberately obscure their methodologies to prevent this.

Also, keep in mind that there's not necessarily a correlation between carrying a balance on your credit cards every month and what's being reported to the bureaus. What do I mean?

Let's say you make a $1,000 purchase on the 1st of the month and your credit card billing cycle ends on the 15th, so a few days before the 15th you pay the balance off, meaning you have no balance at the end of the billing cycle, right? That doesn't mean the bank isn't reporting differently. As a data reporter myself, I submit data to the bureaus twice a month, which has NOTHING to do with my customers' due dates. So even if they don't carry a balance from month to month, if they have any balance at all on one of my scheduled reporting dates then that's what the bureaus get, and that data gets folded into the scoring models to determine your credit usage number. So even though you pay off your balance monthly, there might still be numbers that are getting reported at times when one or more of your cards has a present balance you haven't paid off yet, and your score reflects that.

As a consequence, expect there to be un-and-down movements in your credit score that don't seem to make sense to you when you haven't done anything differently outside of normal patterns. Scores are dynamic in nature and can change daily as your various creditors report account activity.

Still, I'm curious why you're so concerned about the message, since a score north of 800 is outstanding anyway and shouldn't keep you from obtaining new credit, if that's the concern. From what I understand of the various scoring models, the only likely effect of the message you're getting is that you could be offered a smaller starting credit line than you might otherwise get, or you might not get as preferential an interest rate.

Beyond that, I think the consequences of what you're seeing are going to be negligible and not worth being concerned with.

Answer 4

With mortgages this negative reason code can go away with utilization as high as 75% to 80% (i.e., after Private Mortgage Insurance is no longer required).

If the sole installment account is a mortgage, it may be possible to get the maximum points available at a much higher threshold than for other loan types. The current speculation is that this might be as high as getting it under 69% for a mortgage that is at least 37 months old (i.e. over three years of consecutive payments).

Source: myFICO July 22, 2017 "Proportion of loan balances to loan amounts to high" Fico8