Mortgage Rates With Low Credit Scores And Pricing Adjustments
This Article Is About Mortgage Rates With Low Credit Scores And Pricing Adjustments
Borrowers will get higher Mortgage Rates With Low Credit Scores. Lenders will hit borrowers with higher Mortgage Rates With Low Credit Scores. There are no prior adjustments for prior bad credit, late payments, bankruptcy, or foreclosure. On government loans, credit scores are the biggest determinant of mortgage rate pricing. On conventional loans, the credit scores and the down payment are the determinants of mortgage rates. Many consumers may hear that mortgage interest rates have dropped to a year low and are at 3.23%. However, this interest rate is for prime borrowers with 740 credit scores and a 20% down payment. This rate is called the par interest rate. Then, there are loan level pricing adjustments (LLPA). LLPA is also referred to as pricing hits. Lenders charge higher rates for lower credit score borrowers. Lower credit score borrowers are higher-risk clients. Therefore, the higher the risk, the more the rewards. This is why mortgage rates on lower credit score borrowers are higher.
What Determines Mortgage Rates
The higher the risk lenders take on by borrowers, the higher the mortgage rates. Prior bad credit does not determine mortgage rates. Outstanding collections and charged-off accounts will not determine mortgage rates. Prior bankruptcies, foreclosure, deed in lieu of foreclosure, a short sale do not determine mortgage rates.
Here are the factors that determine mortgage rates:
- Credit scores
- Debt to income ratio
- Loan To Value (The higher the loan to value, the higher the mortgage rates)
- Manual versus automated underwriting
- Type of property Condos and multi-family have higher rates than single-family homes)
- Loan amount (Lower loan amount means higher rates)
- Owner occupant versus investment property mortgages (Investment property loans have higher rates)
- FHA 203k Loans Versus Standard FHA Mortgages (FHA 203k Loans have higher mortgage interest rates
Discount Points Charged By Lenders
There is a maximum mortgage rate a lender can charge on government and conventional loans. For example, maximum mortgage rates on FHA Loans today cannot be more than 5.75%. This is the maximum a lender can charge with all loan level pricing adjustments. However, lenders will charge higher LLPA with borrowers under 600 credit scores including discount points.
Let’s take a comparison of two borrowers:
- Borrower A has 700 FICO
- Borrower B has 580 FICO
- They are each purchasing a $200,000 home with an FHA Loan
- Borrower A will get an interest rate of 4.5%
- Borrower B will get an interest rate of 5.625% PLUS he needs to pay 2% discount points
- Discount points can be paid with sellers concessions
- A 2% discount point charge on a $200,000 loan is equivalent to $4,000
Borrowers with low credit scores will definitely get higher mortgage rates and may possibly pay discount points. It is best to try to boost credit scores prior to applying for a mortgage.
Qualifying For Mortgage With Low Credit Scores
Borrowers with low credit scores will definitely get higher mortgage rates due to loan level pricing adjustments. The best way to get lower mortgage rates is to try to boost their credit scores before applying for a mortgage. There are some quick fixes in raising credit scores. Borrowers with no revolving credit tradelines can get a few secured credit cards. Secured credit cards are the best tools for increasing credit scores. Three secured credit cards can do major wonders. Borrowers with maxed-out credit cards can pay down their credit card balances to a 10% credit utilization ratio. Maxed out credit cards lower credit scores.
Qualifying Today With A Lender With No Overlays
Contact Gustan Cho Associates for personal advice in boosting your credit scores and getting the best possible mortgage rates at 800-900-8569 or text us for a faster response. Or email us at email@example.com. We are a mortgage company licensed in multiple states with no lender overlays on government and conventional loans and available 7 days a week, evenings, weekends, and holidays. We are also experts in non–QM and alternative financing loan programs, especially bank statement loans for self-employed borrowers.
October 27, 2021 - 3 min read