Just How Much Your Credit Score Impacts Your Interest Rate
Rhonda Porter on 04 18, 2008
While I was preparing my morning rate quote (I’ll follow up at RCG this afternoon in case of a rate change), I thought I would run a couple scenarios on how much your credit score now cost you…just one digit off and you are paying more for your mortgage.
The following scenarios are based on a 30 year fixed rate conforming with a $500,000 sales price and a loan amount of $400,000 with taxes and insurance included priced with 1 discount/origination point.
720 Credit Score = 6.00% (APR 6.149%). Principal & interest payment on the above loan: $2,398.20.
719 – 680 Credit Score = 6.25% (APR 6.276%). Principal & interest payment on the above loan: $2,462.87.
679 – 660 Credit Score = 6.375% (APR 6.529%). Principal & interest payment on the above loan: $2,495.48.
Of course a borrower with a 719 or less credit score could always pay more in fee (points) to have the same rate as the 720 credit score borrower.
An important point to keep in mind is that lenders use the mid-score when pricing mortgages. When there are two borrowers on the mortgage, then the lowest of the two mid-scores are used for pricing the loan.
In this mortgage climate, you simply cannot start early enough getting preapproved for a mortgage. Many assume their credit scores are excellent and 720 or better, what if your score dipped one point to a whopping 719?
About the Author: Rhonda Porter
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Hi Rhonda,
Does one get better rate with credit score much higher than 720, say 800?
Thanks.
I’m just reading this comment and since this was posted…with the current pricing models (LLPA) 720-739 have a price hit and scores 740 or higher receive the best pricing as far as credit scores are concerned. Loan to values/home equity also impacts pricing…but we’re talking credit scores here.
It’s really too bad someone doesn’t develop something better than the current credit scores for purposes of mortgages. They’re really suited better for approving credit card accounts than mortgage accounts.
Yang, Fannie/Freddie’s credit score pricing is based on 720 or better. Having a credit score of 800 may help with automated underwriting.
Kary, credit scoring is maddening. I’ve seen so many credit reports where it seems someone is either getting too good of a credit score or too harsh.
You pay off your accounts and close them–you get whammo’d.
You consolodate your accounts to a credit card with a lower rate–whammo’d again.
You pay off a collection–your score dips down (and then should improve…but you still get the initial whammo).
It’s a system that get’s played and manipulated. Those who believe they’re doing “the right things” to improve their credit scores may be getting slammed.
Have rates increased that much since last Friday, or is the scenario contrived?
biliruben, it’s based on the same scenario I’ve been using since the last credit score adjustments (720 or better).
With that said, MBS have improved by approx. 50 bps since I posted rates at Mortgage Porter this morning. This is why I try to delay posting between the two blogs…always ever hopeful for a price improvement…which I should start seeing some rate sheets for the better unless lenders decide they’re going to stay tight until Monday.
I’ll stall for a little longer and then get (hopefully improved) rates up at RCG.
What type of rates could I expect with a score below 600? I’m currently trying to help my sister shop for a loan for her first home.
mpo, With a decent credit history and 3% down, FHA may be possible…however, FHA now has price hits on credit scores below 600. It’s really going to depend on what her credit looks like and why her credit scores are below 600.
Rhonda, is FHA still more flexible about explanations of lower credit scores than FNMA?
Leanne, YES. And FHA does not have the same rate based credit scoring (LLPA) as FNMA and FMLC.
Credit scores should be thrown out. They can be manipulated and details are now starting to surface where lenders who relied on credit scores to make loan decisions were actually under pricing the risk when the whole picture came into view.
Toss them out. Let’s go back to manual underwriting where a real human reviews all the facts.
The score gave the lender a false sense of security. We were falling all over ourselves to close loans faster and faster. Now look where we are.
Mortgages are more complex than credit cards. Let Fair, Issac and Co find another market for their scoring system. This market should put a fork in the FICO.
When applying for loan how does the credit history of husband and wife matter? I have good score (750+) but my wife may be in 680-700 range (haven’t gotten her report yet). In this case do they average the scores? Both of us are earning so is it possible only for me to apply since I have better score?
Chaina, lenders will use the lower of the two mid-credit scores. If your wife has a lower mid-score, that’s how your loan will be viewed (priced and underwritten) if she is on it. This one reason why you might see a spouse not on a mortgage (maybe still on title)…which is pretty stinky IMHO.
Jillayne is ccorrect, credit scoring sucks.
Good to know that. Thanks Rhonda for a very informative post and the clarification.
Jillayne wrote: “Mortgages are more complex than credit cards. Let Fair, Issac and Co find another market for their scoring system. This market should put a fork in the FICO.”
I said something very similar, but I don’t think I’d go that far. I think you could modify the score somehow for use with mortgages (well the credit reporting agencies could modify it).
If you’re issuing credit cards, having $20,000 of unsecured credit card debt is arguably a good thing (they’ll make more money off such clients). If you’re issuing a mortgage, it’s a very bad thing. You could adjust the scoring such that for mortgage use, the number was lower when there was more unsecured debt. (Although really even for credit card use they go too far. No one with $40,000 of unsecured credit card debt carried from month to month should have a good credit score.)
Also, I don’t know I’d go so far as manual underwriting, but you could perhaps go part way there and somehow factor in net worth, liquid assets and a few other factors that I don’t think always get taken into account, but really should be huge factors for approving a mortgage.
[...] Just How Much Your Credit Score Impacts Your Interest Rate [Rain City Guide] [...]
I have a score of 667, I am self employed graphic designer, with 390k house/280k (72%) still owed. DTI is at 65% due to a lull in the business 2007& 2008. I inherited my mother’s house worth 150k. I do not want to sell the property it what my mother would have wanted, but I need to rehab it – to rent the property. Is there any typs of loans I should be considering to keep the property. Your thought and help would be appreciated.
thanks
Brady, there are many factors including how much money you need to rehab the home and if that home currently has a mortgage on it.
It sounds as though you’re considering a cash-out non-owner occupied refinance which will be loan to value and credit score sensitive.
Your DTI is going to make it very challenging for a traditional mortgage at this time.
I do want to cash out. this property is in fee simple and is fully paid for. I’m looking for 60% To 70% of value loan for the second home (140K) which is 5 miles from primary resident– which would 90k-98K. the rehab would split the house into 2 rental allowing my brother to cont’ to rent the bottom at his current rent. while allowing the 2nd rental to pay back the loan and taxes. Should I be looking for Nina, Stated income, Hard money….?????, Im’m at a lose, not wanting to sell.
Thanks
Brady, I’m not sure what you’re going to find available.. I’ll do some checking for you.
Brady-
What sort of monthly rent can the property fetch? Be conservative with your estimate.
Currently my brother is paying $500, the split would allow the 2nd unit to be rented at $1300-1500. $1800 total. This is conservative
Okay, Rhonda, what would taxes and insurance be on a property like that?
Brady, where is your property located?
Brian, when I’m doing an estimate and I don’t have the property address, I use 1.25% of the value/sales price for property taxes and estimate an insurance payment.
Assuming the home is local, I would use $4875 for annual taxes and roughly $600 for insurance.
Baltimore Md — insurance is about $600, Property tax is $2000
Brady, I’m going to defer to Brian Brady who is more experienced with hard money or alternative financing. I’m limited to properties in WA state and even if the property was here…it would not be a loan that I could handle in this current market.
Worse case, you might need to wait until either your credit scores improve (depending on your loan to value), you can go full doc or more programs return.
thanks for your efforts and referral
HELLO, MY CREDIT SCORE IS 630. I HAVE FILE BANKRUTCY AND IT WAS SETTLE ON MARCH 6, 2006. WILL I BE ABLE TO BUY A HOUSE.
Dorica, it will depend on a couple factors including how your credit has been since the bankruptcy was discharged. Late payments following a BK will make it challening to buy a home.
Conventional financing recently up the requirement to 48 months since the discharge.
With a 630 credit score, you would be more of a FHA candidate which requires 24 months since the BK.
Other factors may include if the BK was a Chapter 7 or 13 and if there are extinuating circumstances that may have caused the BK (such as medical).
Hello, I purchased a condo in 2005 in AZ for 162k and my Husband purchased a house in AZ in 2004 for 220k. We made these purchases before we became a couple and we just recently got married in 2008. The housing crisis and loss of property values now has my condo at 90k and my husband’s home valued at 120k. My husband took a job transfer in 2007 to WA, so that he could make an additional 30k a year. I stayed behind trying to sell our homes. It has been over a year in a half and we had no choice but to go the short sale route. We couldn’t refinance or sell. We have been trying to do the short sale route and have had nothing but problems for the last 9 months and it now looks like we will both be foreclosing on our homes. ;(. We each brought in 4 to 5 offers each and the banks took to long to get back to the buyers and they went elsewhere. ;( We couldn’t afford an 1800.00 rental (that is the standard price for a rental in WA), my mortgage of 1250.00 and his mortgage of 1800.00 a month. My question is will we ever be able to afford a home in WA? My husband makes 95k a year but WA is so expensive to live. I also had a great credit score of 780 before I couldn’t afford to make my mortgage payments any longer and keep 3 homes afloat. It is unfortunate that I was never late on one bill for 12 years and had perfect credit before this housing mess where I lost 60% of the value of my home and now have a credit score of a 620 before this foreclosure. My husband has a score of 576 because of past debt (before we were a couple)and now his home before his foreclosure. We have been paying off his old debt and the only bad things now on our credit reports are these homes.
Do we have any options in the future? Any suggestions on what we can do, so that we can afford to buy in the next few years? With so many people losing there jobs and homes how is anyone going to be able to get a loan if you now need a 700 credit score and 20% down as a down payment? These are some huge concerns that I have especially with how bad the economy is right now.
Stephanie,
I’m sorry for everything you and your family have gone through. Odds are, short sale would have impacted your credit no differently than a foreclosure and Fannie, Freddie and FHA sees little to no difference either.
With our everchanging guidelines, it’s hard to say what they will be by the time your credit scores are repaired and enough time has passed.
It sounds like you would be a better candidate for FHA financing for your next home because of the low down payment requirement and their easier on credit scores. With that said, I would focus less on buying your next home and concentrate more on building your savings and re-establishing your credit.
Lenders will want to see 3-4 good credit lines where you owe no more than 30% of the balance (ideally less) and you’re making payments on time.
I would count on this taking about 3-5 years after the last foreclosure. And it’s hard to say where home values will be then (part of your question was being able to afford) and what mortgage programs will be available.
Rhonda,
The only debt we have are student loans, 2 car loans, and these homes. We are current on all our other monthly obligations, and have been for years. As I said before the only thing I have late on my credit report is my condo. We will have no credit card debt at the end of this month. If we were able to sell or refinance these homes we wouldn’t be in the position that we are currently in. My husband also makes about 90 to 95k a year, so I’m not worried about being able to afford a home, more about being able to get a good interest rate.
My current credit score is a 620 as of last month. What is an ideal credit score for an FHA financing loan? Also, my husband and I are saving to put down atleast 15,000 on our next home. Will this help with the interest rate?
We aren’t looking to buy another home for atleast 2 in a half years. We want to save more for savings, put more in 401k, and have a down payment for our next house.
Do you think it is even possible to be ready in 2.5 years if we have no cc debt, work on our credit score, and have a down payment?
Stephanie, with how much guidelines are changing, there’s no way for me to guarantee or tell you what will be available for you in 2.5 years.
Right now, 620 or higher provide you with a “preferred” FHA rate.
How many months late are you on your mortgages?
Rhonda,
We are 10 months late on our mortgages because of the transfer to WA. He transferred to go from an income of 60k to 94k. Little did we realize the cost of living was ridiculous in WA. We couldn’t afford the 1800 rental here, the 1250.00 for my condo mortgage and his house was 1800.00 a month. We tried to go the short sale route after looking into refinancing first. We were upside down 60% of what the original home purchases were for the loans, so that wasn’t an option. He was upside down 100k on his house and I was upside down 75k on my condo. We didn’t have 175k in cash to be able to sell them.
As of last month I have a 620(from a 780) and he has a 576 credit score.
What is the preferred FHA rate right now? Also with that rate how much do you have to put down? Just to give me an idea of what % I am looking at in a few years.
Stephanie, if you both had 620 scores right now and no mortgage lates in the past 2 years and no foreclosure, your rate would be in the low 5s (I posted rates this morning at RCG) and you would need 3.5% for your down payment plus closing costs (which the seller could pay).
As I’ve been trying to explain, guidelines change constantly. Maybe in a few years, the downpayment requirement is 5% or maybe down payment assistance programs will be back and it will be zero down–who knows! And there’s no way to know what rates will be in few years.
You’re asking me to look into a crystal ball for you and I can’t. All I can do is provide you with current guidelines.
I would plan on this taking 3-5 years before will consider providing a mortgage.
Stephanie, I don’t know if it will help–but it could be worth a try: have you contacted a HUD approved counselor?
Okay so here’s my problem….I have a credit score of 576 and want to buy a home. Our rent is ridiculous and I just think it would be better used towards my own home. I am engaged and a stay at home mom so my question is can I get a loan with that low of a credit score and will they let me use my fiancees income wihtout himi on the loan? His credit score is very awful due to family illness and letting his payments get behind to help take care of his grandmother. I found a house I LOVE and the payments per month would only be around 60 higher so can someone help me understand all this.
Amber, I’m really sorry but your current credit score will prevent you from obtaining conventional or government insured financing. You might be able to find a mortgage using a “hard money lender”…however, your new mortgage paymetn will probably be higher than what you are currently paying in rent.
You cannot use your boyfriends income without him being on the loan and if his scores are low too, it’s just not going to work.
I recommend finding a local mortgage professional who’s willing to review your credit with you and help you develop a plan to get on the right track to buy a home. It may take you about a year or so depending on how dedicated you are and what your current credit issues are.
The “good news” is that credit scores are reflective and are not permanent.
Well, my situation is making me sick and upset.
Got preapproved mortgage several months ago. My credit score was 719. My mortgage advisor told me to do everything in my power to get it to 720 to ensure the best possible interest rate. Up until last night, I was doing everything possible — paid off many debts, didn’t open up additional cards, etc.
But last night? I get a letter from Chase saying I’m 120 days late on a card. WHAT?! So it turns out one of my cards was charged automatically way back when. I haven’t been receiving my statements so I had no idea it was charged. Had I known about the charge via statements or other notices, I would have paid it off immediately.
I called Chase right away and paid the debt off (roughly $150ish after late fees). They were also able to knock off 30 days off of my credit report (so instead of 120 days late, I’m now 90 days late).
Is there anything else I can do to help my situation? I got a pretty competitive rate for my 719 score and was very close to getting an even better rate if i reached 720. I didn’t lock in because, well, i thought I’d get to 720.
Mike, are you saying that Chase stopped sending you statements for your debt (why were you not receiving statements)? If they were not sending you statements, I believe you may be protected under The Fair Credit Billing Act (of course I’m not an attorney). You might want to try calling them again–and sending them a letter certified mail with a return receipt requested.
The bad news is that this can take a while to get resolved.
You might want to consider hiring someone to help–be careful when doing so (as with anything). I recommend checking out Linda Ferrari: http://lindaferrari.com/credit-services/ (for the record–this is not a paid endorsement–I met Linda last summer at a speaking engagement and I really appreciate her book on credit scoring/repair “The Big Score”).
It’s Chase’s policy not to send statements on closed accounts. Your account can be closed by you or them. It sounds like he hadn’t used the account in a while so the statements may have just stopped coming.
Just because an account is closed does not mean the activity stops. We found this out the hard way. We closed an account, asked for a pay off, called from the escrow office to be sure the pay off would clear the account, but they would only take a check, no wire transfer. You guessed it. The $6 fee ended up being $135 with late fees of $35 per month, and an account fee for the rest. We paid, documented the closed account, and as Mike said we got a credit of 30 days.
Of course my thinking is some bean counter figured out this no statement thing as a way of generating fees. This $100 may be very little to us, but to Chase and the thousands of accounts they have this may end up being millions of dollars on basically dead accounts.
It’s like Sears new policy of changing due dates on account statements. If you don’t read your statement you may be unaware that your due date is now closer to the 1st of the month. It generates a late fee and in come cases that can go on for months.
We’re both making assumptions, here, David. By the way, one thing you do not want to do on established accounts with good credit history if you’re trying to keep your score up is closing them. Older established credit is favored over new credit–you do have to continue using the account–just using it once a month to fill your gas tank or buy groceries and then paying it off will help your credit score. A closed account with a balance is bad for your credit score.
We closed the account, because we didn’t want it, or need it.
Please, I’m extremely well versed in credit, and credit matters.
I am angry with the way consumer credit companies have operated. These are much more than assumptions. These are observations of how credit card companies target people, and then change the rules to get higher interest rates to go along with those gotcha fees.
Every one should cloe their accounts, and stop playing this game. No one should be paying consumer credit accounts. People should just let it go.
It’s a game to the lenders who deal in consumer credit. Yes we get the gold stars of lower interest rates, or better insurance premiums, but those are from the very same lenders who have you chasing the carrots, so you can get another gold star.
Mario Brothers was either based on a consumer credit business model or the model was engineered from a Mario Brothers Video Game.
David,
re: “Please, I’m extremely well versed in credit, and credit matters”
I hope you didn’t take offense, when I write at RCG (including comments) I’m not just addressing the person who comments–I’m hoping to help others who read the post/comment thread in the future–especially if they’re not as “well versed” as you.
Your comment and intention was very clear, the problem is that Mike was hoping to go from a 719 credit score to 720. In the system we have, with banks making a combined set of loans, commercial, consumer, and mortgages, there is no incentive for lenders to help maintain credit scores.
Lenders make money by damaging credit scores. People should be getting that message. It’s a part of financial engineering.
David, I don’t think that Chase intentially damaged Mike’s credit–that’s illegal.
I do agree that banks make more keeping American’s in debt and relying on credit cards…in fact the new Chase commercials I find disturbing where a husband wants to spend money on a trip or a boat but the wife says “we can’t”…not because she wants to do something responsible, she’s all ready bought a very expensive dress for the heck of it. Chase also has another commercial out where some girls are shopping with mom at the mall and texting a boy…then mom gets a text from Chase with their bank account balance…mom seems surprised they have extra cash and decides to continue their spending spree. Bad bank messages IMO…but this is off topics.
Legal is a relative term. You need to read the terms and conditions of the card. It’s all legal.
Chase makes both consumer and mortgage loans. Where is the incentive for them to keep Mike’s credit score good?
As you are pointing out in your post, the lenders make more money the worse your credit is.
A bank will not make any money if they cannot make the loan. If consumers do not take action when/if an illegal action has been made against them, then they are allowing this type of behavior to continue and fester.
Banks make money from serviceing loans. No one wants to make home loans until the value of the assets come in line with what the property can sell for, quickly. The FHA securities are being bought by the Fed, but once that’s over, it’s over. The MBSecurity markets other than that are a dead issue.
So, if a lender can squeze out an extra point here or there they will. They don’t care, they don’t have to. We are swimming in debt of all kinds. Banks have a lot of money coming in, and many ways to do institutional investing. Mike’s home loan is a game they are playing because they have to.
Forgive me for being harsh. You have a job to do and you do it very well. You are one of the good guys.
Sorry, I forgot to spell check.
It seems now you have to have at least a 740 score for a good rate. I wish there was a better way for you to get a good rate baised on credit history. It seems that your debt to income is a main factor on your score and the agencys have no idea what you bring in.
Raphael, it boils down to “risk based pricing” and credit score is combined with the loan to value (amount of down payment/equity). The more money you put down on a home, the less weight your credit score has as far as the rate is concerned.
FHA loans are less credit score sensitive compared to conventional, but I suspect this will change to.
Just want to see what the hopes are for us getting a home. My husband’s scores are about 690, mine is closer to 600. I think mine is so low because I haven’t worked for 12 years (6 kids) and we do all the credit under his name. We have a lien against us from the state for unpaid taxes which they won’t release until they’re paid,, even though we have a payment plan worked out. I think that hurts his score. Anyway, we have no down payment, but will be first time home buyers. I know there are programs out there…but with a bad credit score and no down payment what are the hopes opf us getting into a home for about 220k? If we got a significant gifted down payment would that matter?
Thanks.
Chelsea,
The lender is going to look at the lowest mid-credit score between you and your husband. So if his three scores were (for example) 690, 670 and 700; his mid score would be 690. If your scores were 600, 620 and 610; 610 would be your mid score. Since 610 is lower than 690; 610 would be the score used. Something else to know is that the credit scores a mortgage company pulls are going to be different than what a consumer can pull on-line and different than what an insurance agent or car dealer would pull…we have different scoring modules.
FHA will allow a 3.5% down payment plus you’ll have closing costs. USDA has zero down loans (funding may still be a little tough right now–not sure how available they are)…
But in all honesty, I recommend that you work on building up your savings. Most lenders are going to require that you have at least two months of mortgage payments in savings AFTER closing… I personally think it’s even better to have about 6 months…just in case. Owning a home is expensive–as I’m writing this, I’ve had plumbers at our home for two days!
The lowest credit score our company will accept is 620. Some have higher limits and some may have lower. FHA is changing their guidelines so that those with very low credit scores will have to put more money down–however most lenders will not originate these programs even though FHA says they will accept them.
Last, you’re probably going to need to get that state tax lien paid. When you do, be sure to keep your paper work to show that it’s been satisified.
O.K. here is my situation. I got divorced about a year ago. after the divorce I pulled my credit and was shocked to see 7 collections. I also had a short sale that will be 2 years old in Nov. I have a house that I financed for 99 and currently owe 94k and one other line of credit for 1800 that I have worked down to 400.
Right now my credit score is hovering around the 600 mark, but I have paid off all of my collections and I have been current with on my house for 2 years and have 2 30 lates on my cc (they raised my minimum bal. that I wasnt aware of so I was 10 short those months) what a bummer.
My question is when should I see a bump in the positive with my score? I want to try to refi that home or buy a new one. one last note in that score it doesnt reflect that I have paid down that credit card and there is still 2 collections on there that I have already paid.
Thanks for any help you can give me.
T.J.
TJ, the more time that passes that shows you’re paying your credit on time will increase your score. Credit scoring is accumulative and everything that you had going on has added up. In addition, paying off collections will actually drop your scores a bit because the scoring modules view it as a new activity with your collection. Try to be patient…continue to make on time payments… do not close good credit accounts.