Major Credit Score Rate Adjustments — The Hits Keep Coming

Fannie and Freddie are implementing new loan level price adjustments (LLPA) based on credit score and loan to value. This is a
change for the worse from my previous post announcing the original LLPA. Now your credit score is even more critical. Some lenders are implementing these changes immediately with terms on when the loans must be locked and closed.

The following information is for purchases and rate/term refinances with mortgage terms longer than 15 years (cash out refi’s have additional hits).

The hits shown below are “to price” and not to rate.

LTV (loan to value) 60.01% to 70%
Credit Score 720 or better — no hit
Credit Score 640 -719 is a 0.500% hit to price.
Credit Score 620 – 639 is a 0.750% hit to price.

LTV 70.01 or More
Credit Score 720 or better — no hit
Credit Score 680 to 719 is a 0.500% hit to price.
Credit Score 660 – 679 is a 1.250% hit to price.
Credit Score 640 – 659 is a 1.750% hit to price.
Credit Score 620 – 639 is a 2.500% hit to price.

These “hits” are in addition to other factors that are used for pricing rates and even though I quoted lower credit scores, don’t count on Fannie/Freddie (conforming) financing…especially if you’re eyeing the temporary conforming-jumbo which requires a minimum 660 credit score.

So if you have a 719 credit score and are putting 20% down using a 30 or 20 year fixed rate mortgage, you are going to pay 0.5% more in fee than your friend with a 720 credit score. If your loan amount is $400,000, this is an additional cost of $2000. Or the “price hit” may be factored into to the interest rate. Typically (but not always) 0.5% in fee would equal about 0.125% – 0.25% higher in rate. A quarter point difference in rate runs around $65.00 per month ($775 per year).

Recommended read: How to Improve Your Credit Score.

I also encourage anyone who is considering buying or refinancing a home to meet with a Mortgage Professional as soon as possible. A little time and elbow grease may save you thousands.

40 thoughts on “Major Credit Score Rate Adjustments — The Hits Keep Coming

  1. Pingback: The Difference between a 679 and a 680 Credit Score | Rain City Guide | A Seattle Real Estate Blog...

  2. Between the Treasury Secretary’s comments about Mortgage Brokers this morning and seeing the memos from our lenders about these pricing hikes based on credit scores today, I just wonder how much longer I want to stay in the loan origination business.
    Borrowers need to make sure their loans are locked by Monday and will close and fund by April 17th.
    What an ugly day!

  3. Cathy, I did listen to some of Paulson this morning…I thought it was gearred more towards all originators and not just brokers? Researching his commentary is on my “to do” list but with everything else today…it’s fallen by the wayside.

    Another lender just stopped doing Fannie/Freddie 100 LTV programs… I just know of a couple who are “at this moment”.

    Hang in there! The strong will survive this…although it’s not going to be easy.

  4. I thought Paulson’s comments were very disappointing… just more finger pointing but nothing constructive about what to do about this mess. The rate adjustments in your post are just for purchases. There are additional adjustments on top of those for cashout refi’s making in more unattractive for people trying to pay off debt or get rid of their bad ARM’s. This going to have a huge impact on the entire real estate industry and just make things worse.

  5. This is effectively a stealth rate hike by the GSEs, and I understand it’s not what L.O.s are looking for. I don’t think they’d make this kind of move unless they had to.

    Still, isn’t this how risk-based pricing is supposed to work? The model with adjustments only happening at 620 FICOs or below never made sense to me.

  6. laxtosnoco-I think the 719 score is what floors me. Why not give a break to all those with 700 and above? What truly is the difference between borrowers between the the 19 points.

  7. Rank speculation follows: I wonder what the distribution of borrowers is w.r.t. the credit score? Maybe the number of borrowers with a credit score above 700 is significantly more (much more than linearly) than those above 719 – and using 719 as a cutoff is a good way to reduce and price in risk.

    Rhonda, is this plausible?

  8. Rhonda, I guess you’ve got to draw the line somewhere. I do think there is some difference between someone with spectacular credit and just good credit. Typically, folks with spectacular credit got the same rate as those with a 700 FICO (I have heard some lenders stretch DTI ratios for people with 720+). Why shouldn’t they get a slightly better rate?

  9. Rhonda:

    Did you see a 2.5 hit to price on FHA loans above the previous conforming limit ($362K) from Plaza? Only one lender so far, but others may follow.

    One hand gives, while the other takes away.

    The strong, the studious, and those that truly look out for their clients best interests will survive, as they need our help more than ever to wade thru this mess!

    But it will likely be rough.

    That’s OK, I’ve known rough before. It’s doable.

  10. Rhonda, the answer is 19. 😉

    I agree with Lax on this–it’s risk based and thus makes some sense. And no matter where you set the limits, they will be arbitrary. The problem is credit scoring will be silly at times, but you have to go by something.

  11. Hi All,

    I want to go on record again, as I did just a few weeks ago in predicting that guidelines will have to FURTHER tighten and pricing will FURTHER adjust.

    The secondary market is dead; nobody’s buying mortgage-backed securities because nobody trusts what’s in the files. We severely underpriced the risk and now we’re STARTING to correct.

    The reason the credit scores are taking the hits is because when the ratings agencies started opening up the early defaults, they found that credit score alone was not indicitive of a loan that would perform.

    In order for the credit score pricing to even out, look for lenders who will FULLY UNDERWRITE in order to uncover all risk factors.

    Cathy, I firmly believe that mortgage brokers will play a role today and in in the future. I have a post called “The future of the mortgage broker” that I’ll upload in a few days. I’m working on a major project so I’m in and out for now. I think I know your broker; please tell him hello for me.

  12. Jillayne, probably one reason that the credit scores didn’t predict is because they were in part silly (and still are in some ways). I believe they’ve stopped the thing where you can improve your score by being added to someone else’s account. That was just total nonsense. But it still not perfect. In the past my credit has suffered because of lack of certain types of accounts at that point in time. My score, for example, would be lower because I bought a car with cash or kept it a long time after it was paid off.

    Maybe they need a whole different credit scoring system for mortgages? What’s important for a mortgage lender is probably a lot different than what’s important for a credit card issuer.

  13. Kary,
    there should be a different scoring system. Our current system punishes you if you close an account or do not use your credit. What if you pay cash for everything? You should be “solid gold” but will probably have to go FHA if you don’t have credit scores.

  14. Rhonda, that’s another good example of the absurdity of the system. And isn’t there one where the percentage of credit limit on accounts is considered? Owing $10,000 total on two accounts each with $10,000 credit limits is better than owing $10,000 on one account with a $10,000 limit. These are all things that matter to credit card lenders, but which are actually irrelevant or even bad for mortgage creditors.

  15. To add to Jillayne’s comment, agents have to stop expecting an approval letter to go with their offer within an hour! How valid do you expect it to be if you don’t give the lender sufficient time to be correct?

  16. Kary, you’re right (re. comment 16)…your one card at $10k may have a better interest rate than the two at $5k each… so if you’re concerned about “maximizing your credit score” you need to take some silly actions.

    Another one that stinks is that if you have too much debt on your card, you can ask to have your limit raised to meet the desired % amount the credit bureaus are looking for. CRAZY. Extend more credit, improve your score.

    BTW, getting your credit cards below 50% of your allowable line is the first goal for improving your score. 30% is the next.

  17. How does having other assets work into the mix? I don’t think it improves your credit score a point, but does it help you get a loan?

    I’m just thinking perhaps you could have a net worth in excess of $1,000,000.00, but not meet the silly criteria for having a decent score, and not qualify for a decent loan????

  18. Great question, Kary. Assets help a great deal but…you still need a decent credit score these days. 1mil net worth with a not so hot credit score means you’re paying cash or using “alternative” financing…which is still available.

  19. If you can, please flush this out a bit. Let’s say you have a $1,000,000 net worth, but have not had a car or house loan for 5 years. You have some credit cards, but don’t carry a balance on any of them. You’ve not missed a payment in five years.

    What kind of a credit score are you likely to have, and how’s that going to affect your getting a loan with these new standards?

  20. Kary,
    it’s so hard to speak hypothetical. If you use the cards but don’t keep a balance on them, you should have good credit… there are times I’ve shown my processor a persons credit and say “guess their score”…you would be amazed. People just like you’ve described above with maybe a 680. Someone else with too many credit cards, but they have the right “mix” 720. Who would I lend my money to (if I were to do such a crazy thing)…the 680 borrower that you’ve referenced.

    This is why people should not assume they’re going to be a “slam dunk” (because they should be)…our system may not allow it.

    This is a whole new frontier.

  21. Amen, ARDELL. Lenders need a full package (all supporting documentation) along with a complete loan application for a preapproval. If I were an real estate agent…I’d ask any LO if an underwriter has reviewed the documentation and findings. Even so, most prepreapprovals are subject to “market conditions” even if it’s not stated on the letter. Some lenders are not honoring locks if the program’s gone, it’s gone. Others are being more “honorable”. It’s hit and miss.

  22. ok, I will play devil’s advocate. Responding to comment #15.
    I will qualify that sometimes when I pull credit, I can’t believe the scores that some people get. The premise that if you MUST have a scoring system (that we are stuck with) to make those loans with better scores go faster/easier, then you must put the belief in the sysem that it is a predictor of potential default on future payments. For those of us who have been in the industry for what feels like an eternity, we have all seen these and probably agree that scoring system may be closer to right than our “gut” instints.
    1. this is from an old VA underwriter…”paying all cash does not mean that you have the discipline to make regular installment payments”. It only means that you must save before you buy….The scoring system would be correct as you have have shown no proof of ability to make consistant payments.
    2. “the walking bankrupt” These are the people that you see loan officers scratching their heads as to why their scores are so low…12 credit cards, 3 mortgages all maxed but have never missed a payment…lower scores because if ANYTHING happens they are out.

    I dont think that the scoring system is perfect and I think that underwriters use it as too much of a crutch. There needs to be some sort of better system for hand underwriting instead of “the machine won’t approve, so tough”.


  23. While past performance is not a guarantee of future behavior, it is really the best indicator of future behavior that we have.

    Since lenders are NOT allowed to take many definable attributes into consideration (such as the propensity of one population’s attitudes towards paying debts, or not), to assess proper risks, what other objective criteria can they use?

    Assets and income may indicate an ability to pay debt, but they may not indicate a likeliness to do so.

    The scariest development for banks (and perhaps for all of us that depend on a functioning economy) is the potential for a cultural shift in attitudes towards paying debt, as evidenced by those who choose NOT to pay a debt, even if they are able to (jingle mail). The term ruthless borrower was used in post from Jillayne (I’ll Walk Away…), that about describes it.

    So, if the costs must be apportioned to keep the system running, then it only makes sense to price the risk where the risk resides.

  24. “The scariest development for banks (and perhaps for all of us that depend on a functioning economy) is the potential for a cultural shift in attitudes towards paying debt, as evidenced by those who choose NOT to pay a debt, even if they are able to (jingle mail). The term ruthless borrower was used in post from Jillayne (I’ll Walk Away…), that about describes it.”

    Consumers are just adopting the attitudes that American business has had for years. When was the last time a large corporation paid a debt because they had a “moral obligation”, but could legally avoid paying the debt?

  25. ABR


    I prefer the model where people continue to make rational decisions, tempered with moral and ethical considerations.

    I would NEVER assume a corporation should make any more than a rational (financial) decision. If that decision were based on maintaining a perceived moral appearance (i.e. We are Green, because we care) I can accept that, as most rational people accept that corporations exist solely to make money.

    However, people do not exist solely to make money.

  26. I defended this change a little earlier but thought of a group that will be hurt. It’s very difficult for business owners to have sparkling credit. My father-in-law runs his own business (sole-proprietor) and has only ‘good’ credit because he has a lot of different accounts and frequently gets into disputes with vendors about payments. Most small business owners are going to fall into this category and will be forced to pay higher rates, even though they’re responsible with credit.

  27. Lax, I think that would depend more on the type of business. I’d suspect a lot of vendors of many businesses aren’t credit reporting, so unless it actually gets to a lawsuit and judgment the disputes wouldn’t be known.

    Rhonda pointed out in the other thread (100% going away) that stated income is more of an issue than that. It’s also more of an issue for the people you bring up–they’re the primary ones affected.

  28. I’m wondering if our loan for a home purchase is in jeapardy…we have the 20% down on a purchase price of $289K, but credit issues — FICO score in the 600 vicinity. When we put in the offer, we had Fannie Mae approved underwriting (at a increased rate, which we understood, based on credit score) — but that was back in early February and we were unable to lock in rates as closing isn’t scheduled until May 1. Lender said rate lock could only happen 30 days in advance, after final verification of income, etc. Other than making sure all of our bills continue to be paid on time, is there anything else we can do? If you have access to the newest Fannie Mae guidelines, can you give me a heads up about the type of pickle we might be in, and any advice you would give? I’d really appreciate it! Thanks.

  29. Worried in New England, the best thing you can do is to check in with your loan originator. Ask them if you are still approved. Most lenders will allow longer than 30 day locks.

  30. What I can wrap my head around is raising the rate is an already lean economy. These programs were implement to help middle class Americans buy their homes, now they are punishing those same people. I’m sure we would all love to have a credit score of 750 but this is real life and thing do happen, some months you have to chose between paying the electric bill or the visa. Fortunately for me those months are rare and my credit is good but others don’t have that stability and I think it shameful for these foundations to take advantage of them.

  31. This may be slightly off topic, but it dove tails into credit scoring. I am interested if anyone has run into this yet. I have heard that some of the second mortgage companies have restricted access to clients HELOCs in some “declining markets”. This is even if you have never missed a payment! I wonder how the lenders are reporting this to the credit companies, if at all. It could have a significant impact on someone’s credit score. In the past, if someone was deliquent, the credit would reduce the available credit to 0 and the account woudl show as overlimit until paid off. If they reported this way to someone who had excellent credit, I could smell lawsuit for damages and impact to credit score….

    Has anyone seen/heard of how lenders are reporting these “restrictions”?

  32. Michael Brown, yes…some helocs are being limited or cut back by banks. This can impact your credit score if for example, you had a $100k limit and you’ve used $30,000. This would show a 30% limit being used; however if the bank decides they want to limit their risk (regardless of if the borrower has paid on time) and they cut the line back to $50k; you’re now at 60% ltv–which would ding your score. If they close your line and cut you back to 30k…you have at 100% of your limit.

    Borrowers should be careful when writing checks from their helocs to make sure they still have access. Imagine writing a check and learning that it’s no good.

  33. Beth-NY, I agree for the most part. It’s tough for home owners who need to refi but did not manage their credit, or had unexpected circumstances (health, job, etc)…and now they’re in a tough position. FHA will help many but not unless it makes sense.

  34. I think that there could be a real concern for someone in that area. If the client has made all his payments and they restrict AND they create an “artificially” low credit score, that could lead to higher borrowing costs for those clients through no fault of their own.

    I am wondering who get sued there? It could be a huge deal depending on how they lenders decide to report it. Our industry becomes more interesting every day…..

  35. Pingback: Just How Much Your Credit Score Impacts Your Interest Rate | Rain City Guide | A Seattle Real Estate Blog...

  36. Fannie and Freddie are adjusting the hits again…lenders have all ready factored this into rates as Fannie’s LLPA adjustments are effective on loans delivered to Fannie 10/1/2008 and later.

  37. Pingback: Mortgage Rates on a Summer Day & Adverse Market Pricing | Seattle Real Estate ~ Rain City Guide

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