Low Credit Score Pricing Adjustments On Mortgage Loans
This Article Is About Low Credit Score Pricing Adjustments On Mortgage Loans
Credit scores are the biggest factor when it comes to mortgage rates. Not every borrower gets the same mortgage rates. Mortgage companies start with a par rate for prime borrowers. From the par rate, there will be loan level pricing adjustments added to the par rate. With every pricing adjustment, mortgage rates will increase with pricing hits. Lenders charge higher rates for borrowers with higher risk factors. There are many factors that determine mortgage rates. The number one factor in determining mortgage rates is credit scores. On conventional loans, the down payment or loan to value affects the pricing on the rate. Any loan to value higher than 80% LTV will have a pricing hit to the mortgage rate on government loans. Borrowers can get lower rates than the par mortgage rates if they choose by buying discount points. You can buy down the rate with discount points. One discount point is equivalent to 1% of the loan amount. This is not the case on government loans. FHA, VA, USDA loans has no loan level pricing adjustments on the down payment because government-backed loans are insured and guaranteed by the federal government in the event the borrower defaults on the government loan.
What Are Loan Level Pricing Adjustments
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, for lenders who take risks on bad credit borrowers and lower credit scores, there will be 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 by the mortgage lender 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 and/or refinancing a single-family home. The type of property affects the rate. 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 also need to pay discount points.
The line items below are typical factors for loan-level pricing adjustments. Not all lenders may have LLPA on the factors below. Each individual lender has its own pricing hits on the items below. Other loan-level pricing adjustments include the following factors:
- Credit scores
- Manual underwriting on FHA and VA loans have a slight LLPA
- The down payment if it is lower than 20% down and/or higher than 80% LTV on conventional loans will have an LLPA
- There is no pricing adjustments on down payments for FHA, VA, USDA loans due to the government guarantee
- The loan amount: If the loan amount is lower than $200,000 or less, there will be a pricing adjustment
- The type of property: Single-family homes has the least risk for lenders and condos, multi-family, manufactured home are riskier loans with loan level pricing adjustments
- High debt to income ratio has pricing hits since borrowers with higher DTI are considered to have more risk
Case Scenario On How Low Credit Score Pricing Adjustments Works
Let’s take a case scenario on how Low Credit Score Pricing Adjustments works. The rates used are not current rates and are rates used to illustrate this case scenario.
- Let’s say borrower A and borrower B are each buying a $200,000 home.
- They both are putting in a 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. Rates and pricing adjustments vary depending on the lender and/or wholesale investor. To get the best possible rate, it is best to maximize your credit scores. The team at Gustan Cho Associates are experts in helping borrowers boost their credit scores.
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.
December 1, 2021 - 4 min read