Why is a Credit Score Important?
Why is a Credit Score Important?
In today’s tough economic times, where every person is being
evaluated by a number (Credit Score), having a good Credit Score is
an essential to enjoy an appropriate standard of living. You need to
have a good credit just to rent an apartment, rent a car, open a
bank account, get insurance, get a job, buy a car or obtain a home
mortgage. Depending on your Credit you will be denied, will be
offered a good rate, or will be offered with higher than normal
rate/down payment, etc.
Like most cases in finance, those with the lowest risks get to pay
the lowest rates.
To mortgage lenders, your credit score represents your likelihood of
making on-time mortgage payments for the next couple of years.
Therefore, it is very important to have a good/excellent credit
history and credit score. You also need to know what is in your
credit reports and what your credit score is.
Credit scores play a major role in determining for which mortgage
product or loan you will qualify, and to which rate you will be
assigned by your lender.
In April 2008, both Fannie Mae and Freddie Mac introduced something
called Loan-Level Pricing Adjustments (LLPAs),
also known as “Loan Delivery Fees”.
Loan-level pricing adjustments are percentage of a loan
amount added to a loan fee, based on a specific borrower’s FICO
credit score and LTV.
Table 1 shows these LLPA adjustment based on the LTV and Credit
Score:
|
Table 1: LLPA by Credit Score/LTV |
|
|
LLPAs by LTV Range |
|
<=60.00% |
60.01-70.00% |
70.01-75.00% |
75.01-80.00% |
80.01-85.00% |
85.01-90.00% |
90.01-95.00% |
95.01-97.00% |
97.01-100% |
|
Credit Score |
|
|
>= 740 |
-0.250% |
0.000% |
0.000% |
0.250% |
0.250% |
0.250% |
0.250% |
0.250% |
N/A |
|
720 – 739 |
-0.250% |
0.000% |
0.250% |
0.500% |
0.500% |
0.500% |
0.500% |
0.500% |
N/A |
|
700 – 719 |
-0.250% |
0.500% |
0.750% |
1.000% |
1.000% |
1.000% |
1.000% |
1.000% |
N/A |
|
680 – 699 |
0.000% |
0.500% |
1.250% |
1.750% |
1.500% |
1.250% |
1.250% |
1.000% |
N/A |
|
660 – 679 |
0.000% |
1.000% |
2.000% |
2.500% |
2.750% |
2.250% |
2.250% |
1.750% |
N/A |
|
640 – 659 |
0.500% |
1.250% |
2.500% |
3.000% |
3.250% |
2.750% |
2.750% |
2.250% |
N/A |
|
620 – 639 |
0.500% |
1.500% |
3.000% |
3.000% |
3.250% |
3.250% |
3.250% |
3.000% |
N/A |
|
< 620 |
0.500% |
1.500% |
3.000% |
3.000% |
3.250% |
3.250% |
3.250% |
3.250% |
N/A |
Source:
https://www.fanniemae.com/content/pricing/llpa-matrix.pdf
Published 9/20/2012
Note: For loans with LTV > 80%, additional fee known as PMI (Premium
Mortgage Insurance) will be added to the Mortgage payment.
Table 2: Affect of FICO Credit Score on
Loan-Level Pricing Adjustment Percentage of the Loan Amount
Assuming 20% down (LTV =80%)
Table 3: Affect of FICO Credit Score on
Loan-Level Pricing Adjustment Added Fee
Assuming Purchase Price of $300,000 and 20% down (LTV =80%)
For a given LTV (Loan-To-Value):
·
The higher your credit score, the lower your
Loan-Level Pricing Adjustments (LLPA)
rate will be.
·
The higher your credit score, the lower your LLPA Added Fee +
Mortgage Insurance will be.
·
The higher your credit score, the lower your mortgage or interest
rate will be.
·
Example 1:
A home purchase at $300,000 with 20% down carries a Mortgage loan of
$240,000. LLPA added loan fees which are due at closing for borrows
with credit score of 741 and 655 are $600 and $7,200, respectively.
As you see, the borrower with lower credit score of 655 will pay
extra amount of
$6,600
compare to the borrower with credit score of 741. This shows an
example of a negative impact or cost of a low credit score on a
mortgage loan.
Example 2:
the monthly payment (Principal + Interest) of a $250,000 loan with
30-year fixed rate of 3.5% and 4.5% would be $1266.71 and 1122.61,
respectively. 1% increase in the interest rate in our example will
cost the borrower an additional $51,876 in his/her 30-year loan
term.
Conclusion:
Credit scores play a major role in determining for which mortgage
product or loan you will qualify, and to which rate you will be
assigned by your lender.
The higher your credit score, the lower your mortgage or interest
rate will be.
If you plan to use a mortgage for your next home purchase or buy a
car, you will want to keep your credit scores as high as possible.
Click
What is a Credit Score to see how you can access to your credit
score.
Click this link to see
What makes up a credit score and tips on how to improve it.
By the Way, time is 11:00 AM, do you know what your credit score is?
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