Credit Scores And Mortgage Rates
By Gustan Cho
Credit scores is the biggest determinant on what mortgage rates you get, especially on conventional loans. For FHA loans, if you have a FICO credit score under 600, your mortgage rates will definitely be higher by 1.0% than if your credit scores were over 600 FICO. To get the best available mortgage rate on a FHA insured mortgage rate, you need a credit score of 640 FICO or higher.
To qualify for a conventional mortgage loan, you need a minimum credit score of 620 FICO. A 620 FICO credit score is considered a very low score for a conventional loan so the chances are that you will get quoted with a mortgage rate of 5.0% or higher. Your mortgage rate will get lower for every 20 FICO score improvement. For example, say that you have a credit score of 620 FICO and you get quoted a mortgage rate of 5.5%. If your credit score were 640 FICO, lets assume you get a mortgage rate of 5.25%. For a FICO credit score of 660, your mortgage rate will be 5.0%. For a FICO credit score of 680, your mortgage rate would be 4.75%. A 700 FICO score will improve your conventional mortgage rate to 4.5%. A 720 FICO credit score will earn you a 4.25% mortgage rate. For a 740 plus FICO score you will get the best available conventional mortgage rate of 4.0% on a 30 year fixed rate conforming conventional mortgage loan.
The above is a case scenario on the importance of credit scores and mortgage rates. The higher your credit scores, the less of a risk factor you are under the views of the mortgage lender and higher credit score mortgage loan borrowers are rewarded with lower mortgage rates.
Credit scores do fluctuate every month. If you have higher credit card balances one month, then your credit scores will be lower than a month where your credit card balances are lower. You should make sure that your 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 you sign the mortgage application just prior to the mortgage approval process.
Your Credit Scores Will Dictate Mortgage Rates
As mentioned earlier, when you decide to start the mortgage approval process, your mortgage loan originator will pull a tri merger credit report. A tri merger credit report is your credit report from the three giant credit reporting agencies; Transunion, Experian, and Equifax. You will 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, if your Transunion credit score is 600, your Experian credit score is 650, and your Equifax credit score is 700, the mortgage lender will use the 650 middle credit score from Experian to qualify you. The 650 FICO credit score will be used throughout the mortgage approval process until the closing of your mortgage loan. In the event if the mortgage loan approval process goes beyond 90 days, a new credit report will need to be pulled and the new credit score will be used. The 650 FICO credit score will be used to determine the mortgage rate you qualify for. The higher your credit score, the lower your mortgage rate. In the event if your credit scores improve during the mortgage approval process, you are out of luck and stuck with the 650 FICO credit score. If your credit scores drops during the mortgage approval process, you are in luck because the mortgage lender needs to still go off the 650 FICO credit score in qualifying you and approving your mortgage loan.
What If Credit Scores Drastically Improves During Mortgage Approval Process?
Credit scores fluctuate month to month. The credit score that will determine your mortgage rate category will be the credit score initially pulled at the time you signed your mortgage application and disclosures. There are times where your credit scores will significantly improve during the mortgage approval process and the newer higher credit scores can qualify your for a lower rate. Unfortunately, mortgage lenders do not let you do a bait and switch in the event if your credit scores have significantly improved in the middle of the mortgage approval process. For example, if your mortgage rate was locked at 5.625% due to your credit scores being at a 580 FICO and your credit scores have improved to 623 FICO, the 623 FICO credit score will qualify you for a 4.25% mortgage rate. This is a huge decrease and may save the home loan borrower a lot of money but unless the mortgage loan borrower changes to a different mortgage lender, the 580 FICO credit score will be the credit score that will be used to qualify the mortgage rate. It is extremely important that before a home buyer starts the mortgage approval process that they have their credit scores maximized.
What If I Change Mortgage Lenders To Qualify For A Better Mortgage Rate If My Credit Scores Goes Up
There are cases where I had to change mortgage lenders in order to get a lower rate and the best way to explain this is via a case scenario. If your credit scores are between 580 FICO and 619 FICO, you will qualify for a FHA loan, however the maximum debt to income ratio cap is set at 43%. If your credit scores are over 620 FICO, then your back end debt to income ratio cap is set at 56.9%. One of my clients got approved for a mortgage loan with a credit score of 597 FICO and her debt to income ratio was at 42.5%. Since her credit scores were under 600 FICO, the particular investor I had locked her loan at 5.5%. We were set to close and our closer was preparing the HUD but a last minute hiccup happenned. Her initial homeowners insurance quote was wrong and 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 and my mortgage loan borrower did not have enough funds. I re-ran her credit and her credit scores went up dramatically to a 623 FICO. 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 FICO credit score. Since it was a FHA loan, the appraisal transfer was not a problem and 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 mortgage 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 mortgage loan borrower could not qualify for the loan with the first mortgage lender due to the unexpected increase in the homeowners insurance.
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