Tuesday, April 29, 2008

Credit Score Effecting Interest Rates

The new risk rating outline by Fannie Mae is here. As I was pricing a loan yesterday for a customer, the difference was clear. Fannie Mae and its underwriters will take the lowest middle score of the two borrowers applying for the loan. In this case, the lowest middle score was 697. This completely changed the outcome in regards to pricing.

We were looking specifically at LPMI programs (Lender Paid Mortgage Insurance) and BPMI (Borrower Paid Mortgage Insurance). Under the LPMI program, the interest rate difference was up to a quarter different. From 6.50% with a credit score of 731 to 6.75% with the credit score of 697. This has ramifications not only in how much they may pay, but also in qualifying for a loan.

For example (an extreme example but nonetheless plausible) - Let's say that the borrowers would qualify at a rate of 6.625% but at 6.750% the total debt ratio becomes too high and they can't qualify. Obviously, short of changing programs or going through a manual underwrite, which still may allow them to be accepted for the loan, these borrowers may not be able to purchase this new home. This would be devastating, especially if the credit score difference had very little to do with delinquent payments or a borrower over extending themselves. With the couple I was dealing with yesterday, they had very little debt and were working themselves through the last credit card. Unfortunately, they had a balance that was too high vs. their allowable credit (just over 50%) and that is more than likely what caused the lower score.

In short, be aware of your credit score, it will be vital for your next home purchase.
Check out my blog post on March 5, 2008 for tips on how to improve your credit scores and what to watch for in terms of your credit history.

P.S. There is good news on the horizon for the couple above. The credit reporting agencies are developing a better way to evaluate credit score in light of the recent tightening in the credit markets. This will hopefully allow people to have a credit score that is more indicative of their credit history and not as arbitrary (at times) as the current system. Check out this article for information on Credit Changes http://www.denverpost.com/business/ci_8016232.

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