Low Credit Score Pricing Adjustments On Mortgage Loans
This BLOG On Low Credit Score Pricing Adjustments On Mortgage Loans Was PUBLISHED On May 2nd, 2019
Low Credit Score Pricing Adjustments are also referred to as Loan Level Pricing Adjustments (LLPA).
- Low Credit Score Pricing Adjustments are pricing hits for borrowers with lower credit scores
- Lender views lower credit score borrowers as riskier borrowers thus adding layered risk to lenders
- Therefore, the lower the credit scores borrowers have, the higher the mortgage rates
- There are pricing tiers on credit scores
- To get the best mortgage rates, borrowers will need a 740 credit score on conventional loans and 680 on government loans
- Government loans are FHA, VA, and USDA Loans
- Government Loans are owner-occupant mortgages that are partially guaranteed and insured by FHA, VA, USDA in the event borrowers default and the property goes into foreclosure
- Default and foreclosure on government-backed loans are greater on borrowers with lower scores versus higher scores
- Therefore, lenders who take risks on bad credit borrowers with have a low credit score pricing adjustments
In this blog, we will discuss Low Credit Score Pricing Adjustments and discount points.
How Mortgage Rates Are Priced
Everyone wants lower mortgage rates.
- Whenever consumers follow mortgage rates, they are looking at par rates
- Par rates are the best rates available in the marketplace for prime borrowers
- Prime borrowers are folks who have 740 FICO, 20% down payment, lower debt to income ratios, and great credit and payment history purchasing a single-family home
- Condos and multi-family homes have higher mortgage rates due to pricing adjustments
- Condos and 2 to 4 unit homes are considered higher risk so lenders will have pricing hits
- However, not everyone has high credit scores and perfect credit/income profiles
- For every layered risk, there is a pricing hit
- Lower credit score pricing adjustments have the biggest LLPA out of all pricing hits
- This holds true for borrowers under 640 FICO
Borrowers with under 640 FICO will not have higher mortgage rates but may need to pay discount points.
Case Scenario On How Low Credit Score Pricing Adjustments Works
Let’s take a case scenario on how Low Credit Score Pricing Adjustments works.
- Let’s say borrower A and borrower B are each buying a $200,000 home
- They both are putting 3.5% down payment and are getting an FHA Loan
- Borrower A has a 720 FICO credit score and was quoted a rate of 4.25%
- Borrower B, has a 580 FICO and is getting quoted a mortgage rate of 5.5% with 2% discount points
- So the lower credit score pricing adjustments on borrower B is a 1.25% higher rate PLUS $4,000 in discount points than borrower A
- Bottom line is that lower credit scores will cost borrowers a higher rate and may also cost them discount points
- If borrower B had a 620 FICO, then the rate will be 5.5% with no discount points
- If Borrower B had a 640 FICO, the rate will be at 5.0% with no discount points
- 660 FICO will get Borrower B a 4.75% rate
- 680 FICO will get them a 4.5% rate
- Any scores above a 680 FICO will get them a 4.25% rate
It is best to prepare in getting the highest credit score possible prior to qualifying for a mortgage. An experienced loan officer can help borrowers with boosting their credit scores. There are many quick tricks to the trade in boosting credit scores. Borrowers who are in a hurry to qualify for a mortgage with bad credit can close on their home loan with higher mortgage rates and plan on refinancing at a later date when their credit scores improve.
Discount Points For Lower Credit Score Borrowers
Borrowers with under 600 credit scores will most likely need to pay discount points. One discount point is 1.0% of the loan amount. Discount points are not commissions but a pricing adjustment investors charge the lender. The lender then charges the borrower. Discount points can be paid with sellers concessions and/or lender credit. Discount points are part of closing costs.
The above mortgage rates are just for illustration purposes only and do not reflect past, current, future rates nor is it an offer of any specific rates versus credit scores.