Credit scores and mortgage rates
Since the mortgage meltdown of 2008, all loan programs are subject to risk-based pricing. Your credit score is one of the biggest factors in determining the level of risk assigned to your mortgage. Mark Wells at Preferred Financial Services answers questions about interest-rate pricing, and how your credit scores can affect the rate you are given.
What is “risk-based” pricing? In a nutshell, risk-based pricing is where a lender accepts a higher-risk transaction, and for doing that expects a higher rate of return (a higher interest rate) on their investment. To determine risk, the lender weighs several factors that include the type of housing (primary residence, second home, investment property), the amount of down payment (loan-to-value ratio), the type of transaction (purchase, refinance, cash-out refinance) and the borrower’s credit score. Rates are better for lower-risk loans (primary residence, 25 percent down payment, 740+ scores) and are worse for high-risk loans (Investment property, 5 percent down payment, cash-out loans, 620 scores).
How much difference does my credit score make in the rate I get? Across the general classes of risk, a 740+ score borrower will receive a rate about 0.75 percent better than a 620 score borrower for the same transaction, using conventional loan programs. For FHA and VA, a borrower with a 680 score will receive a rate around 0.25–0.5 percent better than a borrower with a 620 score.
How much difference can that make in my monthly payment? For a $150,000 conventional loan, the 0.75 percent rate difference translates to a $65 per month higher payment. For an FHA or VA loan of the same size, the higher rate can increase your payment $22–$45 per month.
Do all lenders use the same risk pricing? For conventional loans, the rate adjustments for credit scores are universal, since they are set by Fannie Mae and Freddie Mac. FHA and VA pricing can vary slightly lender to lender, as each lender is free to set their own pricing according to their perception of risk.
How can I make sure I’m going to get the very best rate? I highly recommend a “check-up” with your mortgage broker six months to a year before the time you plan to buy a home. Your broker can pull a FICO credit report and explain the factors that most affect your scores while you still have time to address them before starting your loan application.
I welcome questions and comments, can review your credit scores with you, and provide you with any mortgage services you need. I can be reached at 864-235-9596 or via email at Mark@TheGreatestRates.com.
Or Text Me Now! 864-430-4856
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