Nick Pakulla - Mortgage Lender Loan Officer in MD, DC, VA

Show me the money!

Sometimes it is more motivating to see things in real numbers instead of just hearing that it is recommended to have a “good credit” score for the best mortgage rates.

Below are two tables:

• One that shows how much extra in upfront points may be required due to your credit score.
  
• Another table that shows what the actual costs of a lower credit score would be.

This scenario applies to conventional and high balance conforming loans with greater than 15 year terms. So this example is focusing on loans with a Loan to Value (LTV) of 80% and below (75.01 – 80.00% in the table).

An 80% LTV on a purchase can be accomplished by:

1. Putting 20% down
2. Using an 80-10-10 loan

How do mortgage lenders determine credit scores?

Credit scores are pulled from all three bureaus, commonly called a tri merge credit report, for all borrows applying for the mortgage. Then they compare the middle score of each borrower and select the lowest middle score as the representative credit score for the mortgage loan.

To interpret the Loan Level Price Adjustment (LLPA) table below, take the LTV (ie: 80%), and take the representative credit score (ie: 715) to arrive at an adjustment of .75 points.

This Loan Level Price Adjustment Table can be found directly on the Fannie Mae website: https://www.efanniemae.com/sf/refmaterials/llpa/pdf/llpamatrix.pdf. Freddie Mac has a very similar table. The main difference being that instead of a top out of 3.00 points Freddie tops out at 2.75 points.

So, what does this mean for homebuyers with good but not “perfect” credit?

GCAAR recently released housing data February 2010, and the average single family home sale price for Montgomery County for 2010 thus far came in at $454,251. Assuming a first loan value of 80% of the sale price, this would equate to $363,400 financed. What does this mean in terms of actual equivalent dollar amount due to credit score price adjustments?

Looking through the table this means that someone with a credit score between 700-719 and an 80% LTV on a $454,251 property would basically need an additional $2,725.50 to get the same rate as someone with a 740 credit score.

Often lenders price some of the adjustments into the interest rate quote so the borrower isn’t directly paying upfront for the extra, however, the money is coming from somewhere.

Note: If your lender is giving you a loan with Mortgage Insurance (MI), those monthly requirements also go up with lower credit scores. However, since we are able to offer 80-10-10 loans, it is very rare that we do a loan with mortgage insurance, so that analysis is not presented here.

Bottom line: maintaining your credit is important!  Lenders are tightining their belts from what it used to be.

However, there is still good news for buyers without “perfect” credit is that FHA / VA loans do not have nearly as strict credit scoring criteria. FHA funding may be something to consider depending on your specific situation.

A future blog will show some tips to improve and maintain a good credit score.