Conventional Loans And How Credit Scores Affect Conventional Loans
Two of the most popular mortgage loan programs today are FHA Loans and Conventional Loans. Credit scores play a major impact on mortgage rates on all mortgage loan programs, more so in Conventional Loans than FHA Loans. There are three major credit reporting agencies, also called credit bureaus, and they are Experian, Transunion, and Equifax. Each of these credit reporting agencies have their own ways of analyzing a consumer’s credit and coming up with a FICO credit score. Every consumer should have three credit scores, one from each credit bureau. Mortgage lenders will pull all three credit scores from each of the three credit reporting agencies and use the middle FICO credit score when qualifying a mortgage loan applicant. The middle score is what is used to qualify a mortgage loan applicant and the middle credit scores is what is used to determine what mortgage rate a mortgage loan borrower will get. The higher the credit scores, the lower the mortgage rates and the lower the credit scores the higher the mortgage rates. Mortgage lenders view a mortgage loan applicant with a lower credit score as higher risk so that is the reason why they charge higher mortgage rates for a mortgage loan applicant with a lower credit score. How credit scores affect conventional loans? Credit scores is what determines the mortgage rates on conventional loans.
Mortgage Rates On Conventional Loans
Two factors that affect mortgage rates on conventional loans are credit scores and loan to value. Mortgages rates are more sensitive for conventional loans than any other loan programs. FHA Loans, VA Loans, and USDA Loans have government guarantee against mortgage loan borrower default on their mortgage loans, however, the only guarantee Fannie Mae and Freddie Mac Loans ( Conforming Conventional Loans ) has is the guarantee of the private mortgage insurance companies and private mortgage insurance on conventional loans also check the mortgage loan borrower’s credit scores and loan to value before they issue the private mortgage insurance premium. When you hear advertisement on conventional loans, they normally quote par mortgage rates on conventional loans without any pricing adjustments. Par rates on conventional loans are the best mortgage rates offered by conventional mortgage lenders to prime borrowers. Prime borrowers are mortgage loan borrowers with at least a 740 FICO credit scores and with at least 20% down payment. There are pricing adjustments on conventional loans for every 20 FICO Point drop. For example, a prime borrower with 20% down payment with a 740 FICO credit score may be offered a conventional mortgage rate of 4.0%. If a borrower with 20% down payment has credit scores between 720 FICO and 739 FICO credit scores, the conventional mortgage rates may be 4.25%. Again, if a conventional loan borrower with 20% down payment has credit scores between 700 FICO and 719 FICO, the conventional mortgage rates may be 4.5%. Mortgage rates on conventional loan borrowers with 20% down payment with credit scores under 700 FICO may be 4.75%. These mortgage rates are just for illustration purposes only and do not reflect conventional mortgage rates today. As for the question on how do credit scores affect conventional loans, this will be a perfect example on how credit scores affect conventional loans in a big way with regards to mortgage rates.
FHA Mortgage Rates Versus Conventional Mortgage Rates
Again, credit scores plays a big impact on mortgage rates. Mortgage lenders believe that a higher credit score mortgage loan borrower has less probability of defaulting on their home loans. Risk versus rewards is the model behind this so the higher the borrowers credit scores, the less riskier they are, and the lower the mortgage lender can offer mortgage rates to mortgage loan borrowers with higher credit scores. How about FHA Loans? With FHA Loans, the same concept applies, however, credit scores and loan to value do not greatly affect FHA Loans like they do Conventional Loans because FHA Loans are insured by the government against borrower defaulting on their home loans. Let’s take an example with FHA Loans compared to the example on Conventional Mortgage Rates from the previous paragraph. Let’s assume that FHA par mortgage rates is 4.0%. To get this mortgage rate, a FHA mortgage loan borrower may just need credit scores of 640 FICO. No matter how much higher the FHA mortgage loan applicant has than the par credit score requirement of 640 FICO, the 4.0% par FHA mortgage rate will be the best FHA mortgage rates available to the borrower. On the flip slide, if the FHA mortgage loan borrower has credit scores between 620 FICO and 639 FICO, they may get a pricing adjustment of 0.25% where now the FHA mortgage rates for this borrower is 4.25% versus 4.0%. If this FHA mortgage loan borrower has credit scores between 600 FICO and 619 FICO, then the FHA mortgage loan borrower may get a FHA mortgage rate of 4.5%. FHA mortgage rates for FHA mortgage loan borrower’s under 600 FICO credit scores may yield 4.75%. Again, these mortgage rates are just for illustration purposes only and do not reflect today’s FHA mortgage rates. Loan to value do not have any impacts on FHA mortgage rates like they do with Conventional Loans.