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.

Improving Your Credit Score

With every point of your credit score being more crucial than ever, I thought it would be a good time to share some tips on how to improve your credit scores beyond paying your bills on time.   If you are considering obtaining a mortgage within the next 12 months, you should meet with your Mortgage Professional to help advise you on this process.   Some steps in repairing your credit may actually temporarily lower your scores (such as paying off a collection).   What steps you should take depends on how soon you plan on buying a home or refinancing.

  1. Obtain a copy of your report from  You are allowed one free report from each bureau annually.  This comes out to three free reports.   I recommend pulling one report at a time rotating the three bureaus every four months.   For example, this month, you could access your Experian report to review your credit and in May, pull your report from Transunion.  In September, you could obtain your report from Equifax.   This allows you to keep tabs on your credit for free throughout the year.   NOTE:  The bureaus will charge you a fee to access your credit scores (stinky, IMHO); if you’re really interested in obtaining your scores, I suggest you contact your Mortgage Professional and request a tri-merge report.  The cost should be around $20 and the scoring modules used for lenders is different than what you receive from
  2. Review your credit report for errors and contact the creditors demanding they be corrected.  The contact information should be included with your credit report.   Keep a phone log of any conversations and follow up with a certified letter.  Request a confirmation letter for your records of any corrections the creditor offers to make.  
  3. Pay past due accounts current.  Your credit score is penalized for any accounts carrying a past due balance.    
  4. Keep your balances below 50% and 30% of their credit limit.  Review your credit report to see which accounts are just over 50% or 30% of the available credit line.   For example, if you have a credit card with a $1000 credit limit, and the balance is $550 pay down the account to where it stays below 50% of the line ($500 or less).   NOTE:  If you’re trying to reduce your credit debts, you should use a different strategy than maximizing your credit scores.
  5. Don’t close your old accounts in good standing. The scoring modules favor established credit and not new debt.  Keep your old card with a zero balance and use it once a month to fill your tank with gas and then pay it off each month.   Also, closing your accounts do not make them “go away” from your credit report. 
  6. Avoid obtaining new credit.  That new car will not only dramatically impact what you qualify for, it will also zap your credit scores as a new maxed out debt.   
  7. Before paying off old collections, contact your Mortgage Professional.   Depending on your scenario, you may be better paying off the collection after closing on your new mortgage than before.   The credit scoring modules will factor paying off the collection as new activity and ding your score as if the collection is currently “active”.  I actually had a loan declined last year after a client returned a library book that showed as a collection against my advice.   He just needed to wait until after closing (this was a condo conversion and there was a large time span for closing).
  8. If you’re allowing different LOs to pull your credit while “rate shopping” for your lender, do so during a short window (30 days) of time to avoid being hit for inquiries.  

The good news about your credit score is that it is not permanent.   It’s intended to reflect your current credit behavior.  If your credit is a mess, it will take more time, effort and determination to repair it…but it can be done!  

Your Credit Score has Changed

Just as I was getting use to the old algorithm, now a new algorithm!

The nation’s three consumer credit reporting companies – Equifax, TransUnion and Experian – announced a new credit scoring system designed to simplify and improve the credit process for both borrowers and credit grantors.

By combining cutting-edge, patent-pending analytic techniques with a highly intuitive scale for scoring, VantageScore will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply. VantageScore uses score ranges from 501 to 990.

There is more information on VantageScore here: VantageScore.

There has been much talk about providing borrowers and business with a more consistent method of evaluating credit. For even the most experienced people in the lending industry, credit scoring is a confusing subject. A few weeks ago I gave a presentation with Mark Armstrong, American Reporting Company to a group of real estate agents, and my impression was that they seemed starved for accurate information on the subject of credit. In the next few days, I will post parts of that presentation here.

UrbanDigs has more.