Credit Scores vs. Mortgage Rates
Recent changes in the mortgage industry has made Fannie Mae (and most lenders) to review their pricing for conforming loand (under $417,000) to better reflect risk by adjusting their pricing (i.e. the interest rate charged on mortgage loans) according to the applicant's credit score, and loan-to-value ratio (LTV).
The lower the credit score, or the higher the LTV, the higher the interest rate a borrower will be charged. Many clients call me excited about low interest rates they see advertised by lenders. However, those are the interest rates that PREFERRED risk borrowers will get - those with a credit score above 720 and an LTV below 80%.
Kathy Durham from Raven Mortgage sent me an example a while back, for a 95% LTV loan, on a 30-year fixed amortization:
720 Score = 5.625% (323 to 1 chance that bills will be paid on time)
620 Score = 6.500% (26 to 1 chance that bills will be paid on time)
Kathy offers some helpful hints to improve your credit score:
- Don't close old accounts. The older the account, the better. The computers for the three credit rating agencies will read a good payment pattern for an extended term
- Keep 3-5 accounts open and use them occasionally. If you don't use them, they may stop reporting
- Pay all bills on time! :-)
- Don't be tempted to open a charge card at a store for an immediate discount. Too many accounts and the computer may think you are in trouble because you are applying for more credit
- Pay down revolving debt to below 30% of the available credit
- Do not consolidate debts onto one card - see above comment
- Do not send your borrower to a credit repair company