Credit Scores: When Good is not Good
Enough
Only one out of 1,300 people
in the United States have a credit score above 800. These are people with a
stellar credit rating that get the best interest rates. On the other hand, one
out of every eight prospective home buyers is faced with the possibility that
they may not qualify for the home loan they want because they have a score
falling between 500 and 600.
In the past, a consumer with a FICO
score of 620 was considered to be a low-risk borrower by Fannie Mae and Freddie
Mac. Not anymore. After suffering major losses in the mortgage market, the
nation's two largest mortgage finance lenders have redefined risk and begun
charging new Loan-Level Price Adjustments (LLPAs).
LLPAs are automatic,
cumulative fees based on credit scores and the loan-to-value, and they can
significantly increase the cost of mortgage credit. These fees have nothing
to do with your mortgage company or
its various products and cannot be negotiated away.
Note that LLPAs can be paid up front
at closing or be factored into the mortgage itself, with the consumer having the
option to choose.
According to Fannie Mae and Freddie Mac, the
FICO credit score used to determine the fees for borrowers is the "middle" score
of the three scores generated by the three national credit
bureaus. For multiple borrowers, the middle score of the borrower with the
lowest is used. In addition, requirements will vary based on the loan program
and loan-to-value. For those borrowing more than 70% of the home's value, for
example, credit scores must be 740 or more in order to avoid being subject to
the adjustments.
If you are thinking about getting a mortgage in the next
12 months, your credit score is going to be more important than ever. Call your
mortgage professional right away to find out where you stand. In some cases,
professional credit repair may be required, which could take up to six months or
more to achieve the most effective results.
Stay tuned for more
great credit tips!
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