How Credit Scores Affect Conventional Loans Mortgage Rates

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How Credit Scores Affect Conventional Loans Mortgage Rates

This BLOG On How Credit Scores Affect Conventional Loans Mortgage Rates Was UPDATED On July 28th, 2018

Two of the most popular mortgage loan programs today are FHA Loans and Conventional Loans. Conventional Loans are not government loans like FHA, VA, USDA. Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Guidelines:

  • 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
  • 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 credit scores
  • Every consumer should have three credit scores, one from each credit bureau
  • Lenders will pull all three credit scores from each of the three credit reporting agencies
  • All lenders use the middle credit score when qualifying a mortgage loan applicant
  • The middle score is what is used to qualify a mortgage loan applicant
  • Middle credit scores is what is used to determine what mortgage rate borrowers will get
  • The higher the credit scores, the lower the mortgage rates
  • The lower the credit scores the higher the mortgage rates
  • Lenders view a mortgage loan applicant with a lower credit score as higher risk
  • This 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 as well as all other loan programs

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 borrowers 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
  • Private mortgage insurance on conventional loans also check borrower’s credit scores and loan to value before they issue rates on private mortgage insurance
  • When consumers hear advertisement on conventional loans, they normally quote par mortgage rates without any pricing adjustments
  • Par rates on conventional loans are the best mortgage rates offered by lenders to prime borrowers
  • Prime borrowers are borrowers with at least a 740 credit scores and with at least 20% down payment
  • There are pricing adjustments on conventional loans for every 20 Point drop
  • For example, a prime borrower with 20% down payment with a 740 credit score may be offered a mortgage rate of 4.0%
  • Borrower with 20% down payment with credit scores between 720 and 739 credit scores their mortgage rates may be 4.25%
  • Again, if a borrower with 20% down payment has credit scores between 700 and 719 their mortgage rates may be 4.5%
  • Mortgage rates with 20% down payment with credit scores under 700 may be 4.75%

These mortgage rates are just for illustration purposes only and do not reflect 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.

  • Lenders believe that a higher credit score borrowers has the less probability borrowers have of defaulting on their home loans
  • Risk versus rewards is the model behind this
  • The higher the borrowers credit scores, the less riskier they are to default on their loans
  • The higher the credit scores the lower the lender can offer mortgage rates to 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
  • This 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, borrower may just need credit scores of 640
  • No matter how much higher borrowers credit is than the par credit score requirement of 640, the 4.0% par FHA mortgage rate will be the best rates available to the borrower
  • On the flip slide, if borrower has credit scores between 620 and 639 they may get a loan level pricing adjustment (LLPA) of 0.25%
  • Now the FHA mortgage rates for this borrower is 4.25% versus 4.0%
  • If this borrower has credit scores between 600 and 619 then the borrower may get a mortgage rate of 4.5%
  • FHA mortgage rates for borrower’s under 600 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.

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