Start with Better FICO Scores for Better Mortgage Rates
When you want a great mortgage rate, you will need to start with better FICO scores. Lenders go by your FICO credit score to determine your mortgage rate before your next home purchase. If you plan to purchase a home in the near future, you should keep in mind that the higher your score, the better the mortgage rate you’ll qualify for.
Higher credit score – lower mortgage rate
The First Rule of Physics is an object in motion tends to stay in motion. So, you can look at your recent credit history to find the best way to predict a person’s behavior over the near and long-term future. A person that pays his bills on time will most likely continue to pay his bills on time in the near and far future. Therefore, the basis of credit scoring uses your past to predict your future. Mortgage lenders use your credit score to predict the future as to how you’ll pay your mortgage. After 3 months of not paying your mortgage payment, your loan will fall into default. Higher scores correlate with lower default risk which is why people with high scores tend to receive the lower rates. This goes for all types of loans such as conventional, jumbo and FHA mortgages.
In finance, lenders use the FICO scoring model exclusively. The three main credit bureaus in the United States are Equifax, Experian and TransUnion. Each offers a variety of credit scoring products and they are available for purchase on each company website. Prices range from free to a few hundred dollars. However, the nation’s mortgage lenders rely on a different credit model – the FICO model. FICO stands for Fair Isaac Corporation, which was invented in the 1950’s and is the mortgage industry standard for credit ratings today. Now, many people think FICO scores are what all credit scores are called, but that is not the case. And, FICO scores range from 300 – 850.
In 2008 with the major market losses both Fannie Mae and Freddie Mac introduced something called Loan Level Pricing Adjustments (LLPA). Loan level pricing adjustments are discount points added to the mortgage rate based on the risk the lender is taking by loaning money to the borrower. Discount points are loan fees paid at the time of closing. 1-discount point is equal to 1% of your loan. Example – $200,000 mortgage that has assessed 1 discount point will have $2000 in extra fees due at closing. Freddie Mac and Fannie Mae know that low credit scores have the highest default rate and therefore are assigned the highest costs to the highest risk borrowers.
This scale is a brief outline of how it works:
740+ FICO – No discounts points required. This is a low risk loan.
720-739 FICO – 0.250 discount points are charged to the borrower or $250 per $100,000 borrowed.
700-719 FICO – 0.750 discount points are charged to the borrower, or $750 per $100,000 borrowed.
680-699 FICO – 1.500 discount points are charged to the borrower, or $1,500 per $100,000 borrowed.
660-679 FICO – 2.500 discount points are charged to the borrower, or $2,500 per $100,000 borrowed.
If your credit score is not where you’d like it to be, you can take steps now to raise it. In some cases, you can improve your FICO score without changing your spending habits.