Just How Much Your Credit Score Impacts Your Interest Rate April 18, 2008
While I was preparing my morning rate quote (I’ll follow up at RCG this afternoon in case of a rate change), I thought I would run a couple scenarios on how much your credit score now cost you…just one digit off and you are paying more for your mortgage.
The following scenarios are based on a 30 year fixed rate conforming with a $500,000 sales price and a loan amount of $400,000 with taxes and insurance included priced with 1 discount/origination point.
720 Credit Score = 6.00% (APR 6.149%). Principal & interest payment on the above loan: $2,398.20.
719 - 680 Credit Score = 6.25% (APR 6.276%). Principal & interest payment on the above loan: $2,462.87.
679 - 660 Credit Score = 6.375% (APR 6.529%). Principal & interest payment on the above loan: $2,495.48.
Of course a borrower with a 719 or less credit score could always pay more in fee (points) to have the same rate as the 720 credit score borrower.
An important point to keep in mind is that lenders use the mid-score when pricing mortgages. When there are two borrowers on the mortgage, then the lowest of the two mid-scores are used for pricing the loan.
In this mortgage climate, you simply cannot start early enough getting preapproved for a mortgage. Many assume their credit scores are excellent and 720 or better, what if your score dipped one point to a whopping 719?
Check out these related posts:
- Major Credit Score Rate Adjustments — The Hits Keep Coming
- Mortgage Rates for Friday: ARMs and Jumbo’s MUCH Lower!
- The Difference between a 679 and a 680 Credit Score
Article Tags>> credit-score | interest-rate | llpa | mortgage-rate | risk-based-pricing
- Posted in : Buyer Information, General Real Estate, Mortgage and Lending
- Author : Rhonda Porter
Comments»
Hi Rhonda,
Does one get better rate with credit score much higher than 720, say 800?
Thanks.
It’s really too bad someone doesn’t develop something better than the current credit scores for purposes of mortgages. They’re really suited better for approving credit card accounts than mortgage accounts.
Yang, Fannie/Freddie’s credit score pricing is based on 720 or better. Having a credit score of 800 may help with automated underwriting.
Kary, credit scoring is maddening. I’ve seen so many credit reports where it seems someone is either getting too good of a credit score or too harsh.
You pay off your accounts and close them–you get whammo’d.
You consolodate your accounts to a credit card with a lower rate–whammo’d again.
You pay off a collection–your score dips down (and then should improve…but you still get the initial whammo).
It’s a system that get’s played and manipulated. Those who believe they’re doing “the right things” to improve their credit scores may be getting slammed.
Have rates increased that much since last Friday, or is the scenario contrived?
biliruben, it’s based on the same scenario I’ve been using since the last credit score adjustments (720 or better).
With that said, MBS have improved by approx. 50 bps since I posted rates at Mortgage Porter this morning. This is why I try to delay posting between the two blogs…always ever hopeful for a price improvement…which I should start seeing some rate sheets for the better unless lenders decide they’re going to stay tight until Monday.
I’ll stall for a little longer and then get (hopefully improved) rates up at RCG.
What type of rates could I expect with a score below 600? I’m currently trying to help my sister shop for a loan for her first home.
mpo, With a decent credit history and 3% down, FHA may be possible…however, FHA now has price hits on credit scores below 600. It’s really going to depend on what her credit looks like and why her credit scores are below 600.
Rhonda, is FHA still more flexible about explanations of lower credit scores than FNMA?
Leanne, YES. And FHA does not have the same rate based credit scoring (LLPA) as FNMA and FMLC.
Credit scores should be thrown out. They can be manipulated and details are now starting to surface where lenders who relied on credit scores to make loan decisions were actually under pricing the risk when the whole picture came into view.
Toss them out. Let’s go back to manual underwriting where a real human reviews all the facts.
The score gave the lender a false sense of security. We were falling all over ourselves to close loans faster and faster. Now look where we are.
Mortgages are more complex than credit cards. Let Fair, Issac and Co find another market for their scoring system. This market should put a fork in the FICO.
When applying for loan how does the credit history of husband and wife matter? I have good score (750+) but my wife may be in 680-700 range (haven’t gotten her report yet). In this case do they average the scores? Both of us are earning so is it possible only for me to apply since I have better score?
Chaina, lenders will use the lower of the two mid-credit scores. If your wife has a lower mid-score, that’s how your loan will be viewed (priced and underwritten) if she is on it. This one reason why you might see a spouse not on a mortgage (maybe still on title)…which is pretty stinky IMHO.
Jillayne is ccorrect, credit scoring sucks.
Good to know that. Thanks Rhonda for a very informative post and the clarification.
Jillayne wrote: “Mortgages are more complex than credit cards. Let Fair, Issac and Co find another market for their scoring system. This market should put a fork in the FICO.”
I said something very similar, but I don’t think I’d go that far. I think you could modify the score somehow for use with mortgages (well the credit reporting agencies could modify it).
If you’re issuing credit cards, having $20,000 of unsecured credit card debt is arguably a good thing (they’ll make more money off such clients). If you’re issuing a mortgage, it’s a very bad thing. You could adjust the scoring such that for mortgage use, the number was lower when there was more unsecured debt. (Although really even for credit card use they go too far. No one with $40,000 of unsecured credit card debt carried from month to month should have a good credit score.)
Also, I don’t know I’d go so far as manual underwriting, but you could perhaps go part way there and somehow factor in net worth, liquid assets and a few other factors that I don’t think always get taken into account, but really should be huge factors for approving a mortgage.
[...] Just How Much Your Credit Score Impacts Your Interest Rate [Rain City Guide] [...]
I have a score of 667, I am self employed graphic designer, with 390k house/280k (72%) still owed. DTI is at 65% due to a lull in the business 2007& 2008. I inherited my mother’s house worth 150k. I do not want to sell the property it what my mother would have wanted, but I need to rehab it - to rent the property. Is there any typs of loans I should be considering to keep the property. Your thought and help would be appreciated.
thanks
Brady, there are many factors including how much money you need to rehab the home and if that home currently has a mortgage on it.
It sounds as though you’re considering a cash-out non-owner occupied refinance which will be loan to value and credit score sensitive.
Your DTI is going to make it very challenging for a traditional mortgage at this time.
I do want to cash out. this property is in fee simple and is fully paid for. I’m looking for 60% To 70% of value loan for the second home (140K) which is 5 miles from primary resident– which would 90k-98K. the rehab would split the house into 2 rental allowing my brother to cont’ to rent the bottom at his current rent. while allowing the 2nd rental to pay back the loan and taxes. Should I be looking for Nina, Stated income, Hard money….?????, Im’m at a lose, not wanting to sell.
Thanks
Brady, I’m not sure what you’re going to find available.. I’ll do some checking for you.
Brady-
What sort of monthly rent can the property fetch? Be conservative with your estimate.
Currently my brother is paying $500, the split would allow the 2nd unit to be rented at $1300-1500. $1800 total. This is conservative
Okay, Rhonda, what would taxes and insurance be on a property like that?
Brady, where is your property located?
Brian, when I’m doing an estimate and I don’t have the property address, I use 1.25% of the value/sales price for property taxes and estimate an insurance payment.
Assuming the home is local, I would use $4875 for annual taxes and roughly $600 for insurance.
Baltimore Md — insurance is about $600, Property tax is $2000
Brady, I’m going to defer to Brian Brady who is more experienced with hard money or alternative financing. I’m limited to properties in WA state and even if the property was here…it would not be a loan that I could handle in this current market.
Worse case, you might need to wait until either your credit scores improve (depending on your loan to value), you can go full doc or more programs return.
thanks for your efforts and referral