Shopping Mortgage Rates With Low Credit Scores

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This BLOG On Shopping Mortgage Rates With Low Credit Scores Was UPDATED On May 7th, 2019

Home buyers and homeowners needing a mortgage rates are encouraged to shop for the best mortgage rates.  Shopping mortgage rates has many variables. It is not like shopping for a car or other items.

  • Just because borrowers have perfect credit and low debt to income ratios does not mean they will always have the best mortgage rates
  • Each lender has their own mortgage rate formula called Loan Level Pricing Adjustments (LLPA)
    • varies on many factors and not just a borrower’s credit and financial profile
    • debt to income ratio
    • pricing adjustments for manual underwriting on VA and FHA Loans
    • pricing hits on lower loan amounts
    • also depending on the geographic region
    • type of property pricing hits
    • mortgage loan program pricing hits such as higher rates for FHA 203k Loans

Mortgage Rates Versus Types Of Properties

There’s Loan Level Pricing Adjustments on with mortgage rates depending on types of properties. Mortgage rates will be higher on second and investment property financing versus purchasing a single family homeMortgage Rates are higher if lenders has to take on added risk.

Here are cases where there are higher LLPA (pricing adjustments):

  • Purchasing a condominium unit versus a single family home
  • Purchasing a two to four unit building versus a single family unit
  • Mortgage rates in Florida may be higher than mortgage rates in Illinois
  • Mortgage rates will be higher on higher LTV than having a lower loan to value
  • For example, a conventional buyer does not need private mortgage insurance if they put 20% down payment
  • This borrowers will most likely get a good mortgage rate on their conventional loan due to putting skin in the game with 20% down payment
  • However, if buyer were to put a 25% down payment versus a 20% down payment, buyer’s rates will be lower than if he were to put a 20% down payment due to less risk the lender has

Why Are There So Many Variables In Pricing Mortgage Rates?

The reason there are so many variables with mortgage rates, even for mortgage borrowers with perfect credit, is due to risk factors.

  • Most home buyers and homeowners needing refinance mortgage know that the higher your credit scores and better financial profile that they will get a better mortgage rate
  • However, credit scores are not everything a mortgage lender considers when quoting a mortgage rate
  • The property itself, the property type, and the location of the property play a major role in mortgage rate adjustments
  • The reason the property type affects mortgage rates is due to risk
  • A condominium unit is riskier for a lender than a single family home so mortgage rates on a condominium is higher than that of a single family home
  • Two to four units are riskier investments for a mortgage lender than a single family home because in the event if tenants default on their rental payments or if renters trash the apartment unit, it affects the homeowner
  • Second home and investment properties are higher risk for mortgage lenders because in the event of financial hardship, a homeowner is less likely to default on their owner occupant homes than they would on their second homes or investment properties

Shopping Mortgage Rates With Low Credit Scores

Conventional mortgage rates are prone to credit scores.  The minimum credit score required to qualify for a conventional loan is 620.

  • A 620 credit score is considered a poor credit score for a conventional mortgage borrower
  • The chances are that if you are a conventional mortgage loan borrower with a 620 credit score, you will get stuck with a high mortgage rate
  • Home buyers or homeowners with credit scores of 620 will be quoted a higher mortgage rate no matter where they shop
  • Many conventional mortgage lenders will have overlays on credit score requirements and may not even accept mortgage loan borrowers with credit scores under 680

Mortgage Rates On FHA Loans

FHA mortgage rates are different.  For FHA mortgage rates, any mortgage loan borrower with credit scores of 640 or higher will normally get the best FHA available mortgage rate possible.

  • The reason this is the case is the government insures FHA loans against losses to the lenders who originate FHA loans
  • However, FHA mortgage rates will and can be higher for borrowers below 640 credit scores
  • For home buyers with credit scores under 600 credit scores, FHA mortgage rates can exceed 5.0%
  • There are a few wholesale lenders that still offer mortgage rates under 5.0% mortgage rates for borrowers under 600 credit scores

Options For Borrowers With Low Credit Scores

Unfortunately, mortgage borrowers with low credit scores do not have the luxury and option shopping mortgage rates unless they can improve their credit scores.  Borrowers with low credit scores have two options:

  • Wait until they improve their credit and credit scores
  • Or purchase a home now with low credit scores and plan on refinancing their home purchase at a later date once their credit scores have improved
  • It depends on how much in a hurry they are in buying a home
  • Some home buyers prefer to wait until they improve their credit scores
  • One of the risk factors they face is that many home prices are increasing in value month after month in many parts of the country, especially in the following states:
    • Florida
    • Most areas of California
    • Illinois
    • Texas
    • Washington
    • Maryland
    • Kansas
    • Ohio
    • Utah
    • Indiana
    • Wisconsin
    • Texas
    • Georgia
    • Nevada
    • Arizona
    • New Jersey
    • Michigan
    • Minnesota

Shopping Mortgage Rates is highly recommended for all home buyers and homeowners. However, borrowers with under 600 credit scores may not qualify with many lenders. Shopping Mortgage Rates with under 600 credit scores will yield higher credit scores and many lenders may require paying discount points. Home Buyers who are in a hurry to purchase a home may want to purchase the home now and work on their credit after they close on their home purchase. After their credit scores improve, they can start shopping mortgage rates and refinance at a substantially lower mortgage rate.

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