Mountain Mortgage Guy: A low credit score will cost you on a home loan (column)
The Mountain Mortgage Guy
Some amongst us are, shall we say, credit-score impaired. Some people just never met a bill they liked to pay. Others have gone through a rough divorce, a bout of unemployment or faced enormous medical bills. Some people just get overwhelmed with an emergency car or home repair.
To keep track and gage a consumer’s credit worthiness, scoring systems have been developed to determine the likelihood that an individual will be able and willing to pay his future bills. There are many scoring models out there, but the gold standard that is used by mortgage lenders is called a FICO score (which is named after its creator, the Fair Isaac Co.).
FICO scores will dictate the interest rate you pay, the amount you pay for mortgage insurance (if you have less than 20 percent down), in some cases how much you can borrow and overall how the lender looks at your loan application. There are also built-in pricing factors tied to the credit score and loan to value.
The difference between what a credit score superstar and the credit impaired pay for a home loan is quite substantial. Let’s assume that Mrs. Smart has a 760 credit score and Mr. Notsosmart has a 620 score. Both are looking at neighboring homes for $400,000 and have 5 percent down, which means a loan amount of $380,000.
The credit score superstar Mrs. S would qualify for a 30-year fixed rate at about 3.875 percent and a monthly principal and interest payment of $1,786. Mr. N, on the other hand, would find his choices limited and likely be offered a rate of about 4.625 percent with a principal and interest payment of $1,953, or $167 per month more just because he had a low score. Over 30 years, that adds up to an extra $60,120.
But next comes the mortgage insurance charge. Mrs. Smart would pay a monthly premium of about $129. Mr. N would get hit with a premium of $509, or $380 higher. Overall, Mr. N would pay $547 a month more. He would also have to make about an extra $13,000 a year more than his soon-to-be neighbor to qualify for his mortgage.
There are other options for the credit-score impaired. Federal Housing Administration loans are much more forgiving and do not factor in credit scores when calculating mortgage rates or mortgage insurance. In the above example, both borrowers would be assessed the same mortgage insurance charge of $269 per month.
Obviously, it would benefit Mrs. S to get a conventional loan, while Mr. N would benefit from an FHA. But nothing is quite that simple. FHA loans also have a one-time, upfront mortgage insurance charge of 1.75 percent, which in this case would equal $6,650. So, as you can see, the gap widens again between the credit score superstar and the credit score impaired.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.