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2019 Idaho Real Estate Blog

How Your Credit Score Affects Your Mortgage Payments Main Boise Home Loans
The equity in your home as collateral doesn't matter as much in this 'New World' that I work in as it did 2-3 years ago. Your mortgage lender DOES NOT want to own your property! Now, more than EVER, your credit score is your first class ticket to the best mortgage rates.

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Dear BuildingCredibility.com reader:

Back in 2004-2005, when the housing boom was really starting to take off, a credit score of 680 was usually enough to guarantee you the best of mortgage rates. Not so fast on that thought any more. Let's outline some of the things that can hurt you in your quest to qualify for a mortgage if you have poor credit.

FORECLOSURE/SHORT SALE SEASONING

Unfortunately, many people are being advised to try to "short sale" their home (sell for less than the principal owed) to avoid foreclosure...and are being told that this won't affect your credit. HOGWASH! Depending on how your lender reports the short sale on your credit report, your next mortgage application may not get approved because the underwriter will look at your short sale the same way they look at a foreclosure. Technically, even though a short sale does not go through the legal process of foreclosure, you are in default on your mortgage if you do not make all principal payments required by the legal binding promissory note you signed. Trust me...this will be the source of many lawsuits in the future...homeowners who were inappropriately counseled into a short sale will be very upset with those who told them their credit would not be impacted.

NO CASH OUT REFINANCES

Many lenders/investors are now requiring credit scores as high as 700-720 to even qualify for a cash-out refinance. Another misconception out there is that if you refinance to just pay off existing mortgage debt, then it is not considered cash out. A rate/term refinance is only to pay off existing mortgage debt that was used exclusively to purchase a home. So, if you want to roll your first mortgage and 2nd position HELOC into a new rate/term refinance, but the HELOC you're paying off is really the new SUV sitting in your garage, be prepared to potentially pay higher rates or not qualify...this is a cash-out refinance.

PRIVATE MORTGAGE INSURANCE WILL COST YOU MORE

PMI is lender insurance required when you finance more than 80% of your home's value on a mortgage. The lower your credit scores, the more you will pay for these higher loan-to-value refinances.

LOAN LEVEL PRICE ADJUSTMENTS

Newly introduced in early Spring of 2008, these price adjustments (LLPA's) will raise the interest rate you will pay on a mortgage for credit scores lower than 720-740. Each investor has different rate and pricing adjustments for lower credit, but look at the table below as a good estimate of what you should expect to pay.

ASSUMPTIONS -- $200,000 loan on a 360 month/30 year amortization, and assuming an interest rate of 6% BEFORE the LLPA

Credit Score Interest Rate Adjustment Potential Monthly Payment
740+ +0% $1,199.10 (at 6%)
700-739 +.125%-.375% $1,247.74 (at 6.375%)
680-699 +.5%-.75% $1,297.20 (at 6.75%)
660-679 +1% $1,330.60 (at 7%)
640-659 +1.5% $1,398.43 (at 7.5%)
<640 +2%-2.75% $1,537.83 (at 8.5%)

Interest rates and mortgage scenarios shown above are to illustrate LLPA's and their affect on the rate you may pay only. These rates are not to be considered indicative of current market conditions and do not reflect the potential closing costs/APR that you would actually pay for a mortgage. The material contained in this table is for informational purposes only and is not intended as professional advice.

So, do you still think that your 680 score is good enough for the mortgage application?

In short, it should now be painfully obvious that your credit score can have a major impact on your mortgage scenario...an impact that was not felt like this just two short years ago. This have changed dramatically in the past year, and will continue to change as we work through this mess we're in.

If you are interested in talking more about this post or a specific credit scoring issue you have or know about, feel free to call me at (208) 880-0316, or email me at eric@ericsloans.com. You can also visit my website at http://www.ericsloans.com.

Best Regards,


Eric Leigh, Mortgage Consultant
2965 E. Tarpon Drive, Ste. 150
Meridian, ID 83642
(208) 880-0316
http://www.ericsloans.com
eric@ericsloans.com
 
Posted by Eric Leigh at 2/13/2009 1:27:00 PM
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