Credit Score Improvement In Mortgage Process Benefits Rates

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Credit Score Improvement In Mortgage Process Benefits Rates

This BLOG On Credit Score Improvement In Mortgage Process Benefits Rates Was UPDATED On April 26th, 2019

Credit scores is the biggest determinant on what mortgage rates borrowers get, especially on conventional loans.

  • For FHA loans, if credit scores are under 600, interest rates will definitely be higher
  • Loan Level Pricing Adjustments (LLPA) are pricing adjustments on borrowers due to lower rates
  • LLPA on under 600 credit scores can be a pricing adjustment of 1.0% than if credit scores were over 600
  • To get the best available mortgage rate on an FHA Loan, borrowers need a credit score of 640 or higher

To qualify for a conventional mortgage loan, borrowers need a minimum credit score of 620 :

  • A 620 credit score is considered a very low score for a conventional loan
  • We will use case scenario with illustrative sample rates:
    • Chances are borrowers will get quoted with a mortgage rate of 5.0% or higher
    • The mortgage rate will get lower for every 20 score improvement
    • For example, with a credit score of 620, the mortgage rate will be priced at 5.5%
    • If credit score were 640, let’s assume pricing is at a mortgage rate of 5.25%
    • For a credit score of 660 mortgage rate will be 5.0%
    • Borrowers with credit scores higher than 680 pricing would be 4.75%
    • 700 score will improve conventional mortgage rate to 4.5%
    • A 720 credit score will yield a 4.25% mortgage rate
    • For a 740 plus score yields the best available conventional mortgage rate of 4.0% on a 30-year term

The above is a case scenario on the importance of credit scores and mortgage rates. We used fictitious sample rates for illustrative purposes.  The higher the credit scores, the less of a risk factor borrowers are under the views of the mortgage lender. Higher credit score mortgage loan borrowers are rewarded with lower mortgage rates.

Fluctuations Of Credit Score Improvement In Mortgage Process

Credit scores do fluctuate every month.

  • Consumers have higher credit card balances one month, then credit scores will be lower than a month where credit card balances are lower
  • Consumers should make sure that credit scores are at the highest potential prior to starting the mortgage approval process
  • The credit scores that will be used throughout the mortgage approval process will be from the credit report that will be pulled at the time borrowers sign the mortgage application
  • Credit Score Improvement In Mortgage Process can benefit borrowers
  • The higher credit scores can be used for pricing and locking the mortgage rates

Credit Score Improvement In Mortgage Process Will Dictate Mortgage Rates

As mentioned earlier, when you decide to start the mortgage approval process, the mortgage loan originator will pull a tri merger credit report.

  • A tri merger credit report is a credit report from the three giant credit reporting agencies;
    • Transunion
    • Experian
    • Equifax
  • Borrowers have three credit scores;
    • one credit score from each of the three credit bureaus
  • The mortgage company will use the middle of the three credit scores
  • For example
    • Transunion credit score is 600
    • Experian credit score is 650
    • Equifax credit score is 700
  • The mortgage lender will use the 650 middle credit score from Experian to qualify
  • The 650 credit score will be used throughout the mortgage approval process until the closing of a mortgage loan
  • In the event, if the mortgage loan approval process goes beyond 120 days, a new credit report will need to be pulled and the new credit score will be used
  • The 650 credit score will be used to determine the mortgage rate borrowers qualify for
  • The higher the credit score, the lower the mortgage rate
  • In the event, if there is credit score improvement in mortgage process
  • Some lenders like The Gustan Cho Team can use the newer Credit Score Improvement In Mortgage Process to price out the mortgage rates prior to locking the loan
  • If credit scores drop during the mortgage approval process, borrowers are in luck because the mortgage lender needs to still go off the 650 credit score in qualifying and approving a mortgage loan.

What If Credit Score Improvement In Mortgage Process Is Significant?

Credit scores fluctuate month to month.

  • The credit score that will determine mortgage rate category will be the credit score initially pulled at the time mortgage application and disclosures
  • There are times where credit scores will significantly improve during the mortgage approval process
  • The newer higher credit scores can qualify for a lower rate
  • Unfortunately, most lenders do not let you do a bait and switch in the event if credit scores have significantly improved in the middle of the mortgage approval process
  • For example, if the mortgage rate was locked at 5.625% due to credit scores being at a 580
    • credit scores have improved to 623
    • 623 credit score will qualify for a 4.25% mortgage rate
    • This is a huge decrease and may save borrowers a lot of money
    • But unless borrowers changes to a different mortgage lender, the 580 credit score will be the credit score that will be used to qualify the mortgage rate if the lender will not let borrowers use the Credit Score Improvement In Mortgage Process to price out the loan
  • It is extremely important that before a home buyer starts the mortgage approval process that they have their credit scores maximized
  • Gustan Cho Associates will allow the new Credit Score Improvement In Mortgage Process to be used in locking rates

What If I Change Mortgage Lenders To Qualify For A Better Mortgage Rate If My Credit Scores Goes Up

There are cases where borrowers change mortgage lenders in order to get a lower rate due to credit score improvement during mortgage process. The best way to explain this is in a case scenario.  If credit scores are between 580 and 619, borrowers will qualify for an FHA loan. However the maximum debt to income ratio cap is set at 43%.

  • If credit scores are over 620, then back end debt to income ratio cap is set at 56.9%
  • One of my clients get approved for a mortgage loan with a credit score of 597
  • Her debt to income ratio was at 42.5%
  • Since her credit scores were under 600, the particular investor I had locked her loan at 5.5%
  • We were set to close
  • Our closer was preparing the HUD but a last-minute hiccup happened
  • Her initial homeowner’s insurance quote was wrong
  • With her new homeowners’ insurance quote, her debt to income ratios exceeded the mandatory 43% maximum debt to income ratios allowed per Fannie Mae’s Automated Underwriting System
  • We needed to lower the debt to income ratio threshold under the 43% DTI mark
  • I tried everything including trying to buy down the rate
  • Buying down the rate was way too expensive
  • The borrower did not have enough fund
  • I re-ran her credit and her credit scores went up dramatically to a 623
  • The existing mortgage lender could not substitute the new credit score so what we ended up doing was canceling the mortgage file with the existing lender and taking it to a different lender with her new 623 credit score
  • Since it was an FHA loan, the appraisal transfer was not a problem
  • Since my processor had almost a clear to close from the previous lender, she had all the documents in order
  • The mortgage loan borrower needed to sign a new mortgage and disclosure package and once we got the signed documents we submitted to underwriting
  • Long story short, we ended up closing the loan at a 4.25% mortgage rate in 2 weeks

The above case scenario is an actual case scenario.  Most lenders will not accept a mortgage file if they just kill the deal from one lender and go to a different lender without any merit and just to get a better rate.  The above case scenario had merit due to the fact that the borrower could not qualify for the loan with the first lender due to the unexpected increase in the homeowner’s insurance.

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