The Credit Solution Program

How Credit Scores Affect Home Loans

Written by: Aaron Crowe

A good credit score can make a lot of things more affordable. Not only will you likely get a lower credit card interest rate, but a positive credit check when you buy a car or apply for credit can lead to a better rate and much lower monthly payments.

This is especially true for home buyers with excellent credit scores, including married couples where one spouse has a poor or good credit score, and the other has an excellent credit score.

Leah Manderson, a financial planner in Atlanta, GA, bought a house with her husband last year and got a home mortgage loan that was half of a percentage point lower because her husband has an “excellent” credit score and she has a “good” score, Manderson says. His score got them a rate of 3.25%, while hers brought the interest rate up to 3.75%.

They were able to afford the house on just his financials, she says, and they saved $30,000 in interest over the life of the loan.

Fannie Mae loan criteria

Home loans from Fannie Mae and Freddie Mac have what are called Loan Level Price Adjustments, or LLPA, says Sean McGeehan, a mortgage loan officer in Illinios.

The chart for Fannie Mae loans, for example, lists pricing tiers based on credit scores. Depending on the loan-to-value ratio (LTV), an excellent credit score of 720 or more can add nothing to a home loan interest rate, while a credit score of 620 or less would adds 1.5% to the rate.

Loan-to-value is the ratio of a loan to the value of the property. For example, someone borrowing $130,000 to buy a home worth $150,000 has an LTV of 87%.

The loan rate can swing 1-2%, depending on the criteria and credit score, McGeehan says.

“If a home buyer is a 739, for example, we may coach them into paying down a credit card or we’ll look for inaccuracies on their credit report to help put them over the 740 mark for best case pricing,” says Sean McGeehan, a mortgage loan officer.“A 740 credit score or higher will typically put you in the best bucket of credit score pricing,” he says. “If a home buyer is a 739, for example, we may coach them into paying down a credit card or we’ll look for inaccuracies on their credit report to help put them over the 740 mark for best case pricing.”

LLPAs are considered in loans from the Federal Housing Administration, or FHA, McGeehan says. “This is one area when FHA sometimes becomes a better loan than conventional,” he says. “If you have someone with a 650 credit score and wants to do a low down payment program usually FHA’s rate will be better than conventional.”

600 credit score a ‘loan killer’

While a low credit score under 600 is a “loan killer,” even a score of 700 or better isn’t a slam dunk for a home loan at a great rate, says Gloria Shulman, owner of Centek Capital Group in Beverly Hills, Calif.

“Banks are equally as strict with income as they are with credit, and a strong W-2 will ideally position a borrower for the lowest available rate,” Shulman says.

How important is meeting both the credit and income requirements? The difference in the monthly payment for a $429,000 loan between the highest and lowest scores is easily more than $300, which over a 30-year fixed mortgage can add up to more than $100,000, she says.

Interest rates can vary as much as 1.5% for credit scores between 650 and 700, she says.

740 is the new 680

Lenders give better interest rates to people with high credit scores because they’re more likely to make payments on time.

But having a score over 740 doesn’t mean you’ll get a lower interest rate than advertised, says Gregory Meyer, community relations manager at Meriwest Credit Union in San Jose, Calif. “It just means you are more likely to be granted a loan with the advertised lowest rate,” Meyer says.

“As our scores go lower than 740, we may see some increases in interest rates for home loans. Some mortgage companies are still able to make loans at good interest rartes to people with scores as low as 680,” says Gregory Meyer of Meriwest Credit Union.“But as our scores go lower than 740, we may see some increases in interest rates for home loans,” he says. “Some mortgage companies are still able to make loans at good interest rates to people with scores as low as 680.”

A 680 was the best credit score to shoot for before the Recession, but since then, increased loan defaults have caused lenders to raise the bar for credit scores to 740 and above.

“When a borrower is below the 700-680 range, it becomes more difficult to qualify for a good interest rate,” Meyer says.

That can lead to “risk based pricing” where a borrower with poor credit is charged a higher rate to offset the risk in lending to someone with less than perfect credit, he says.

“During the Recession, this practice was frowned upon by regulators and was not in regular use,” Meyer says. “We are starting to see more of this sort of lending as the economy slowly improves.”



avatar Aaron Crowe is editor at The Credit Solution Program. He is a freelance journalist in the Bay Area who specializes in personal finance. He has been a writer and editor at newspapers and websites, including AOL’s personal finance site WalletPop.com, WiseBread, Bankrate, LearnVest, AARP and other sites. Follow him on Twitter at @aaroncrowe, or at his website, www.AaronCrowe.net.

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avatar Keisha Jones says:

Hello everyone. I would just like to share my credit solution journey. About four months ago I decided to try Mikes credit solution program, and it works. I did everything he said to do in his videos and my fico score went from a 520 to a 655 in three months. It is not that high, but it is high enough to buy a home which was my goal all along. It is also improving every month by me reducing my credit card ratio and so many items that have been deleted because of inaccuracies or I paid them off.
I am still working on my husbands, he to has student loans that were “late”(but he has not started to pay on them yet). We contacted Mohela and they do not want to delete the “late” payments. Any advice?

[Reply]

avatar

Abbey B Reply:

Hi Keisha,

Thanks for sharing your story, it’s great to hear that you have had so much success using the program! If you feel like the creditor is reporting inaccurate information, you can contact them in writing and request that they verify its accuracy or remove the negative items entirely. Investigating your request takes time, money, and resources, so it is easier for them to just remove the item. You are also presenting yourself as the type of person who may seek legal action against them, although you want to avoid threatening them with it if you don’t intend to pursue it.

This can be a very powerful tactic when done correctly, and could make a huge difference in your credit score. Good luck!

Abbey

[Reply]

avatar title loan says:

Thanks for finally writing about >How Credit Scores Affect Home Loans <Loved it!

[Reply]

avatar pam tano says:

Hi. I fell on hard times and got 2 loan modifications on 2 of my 3 properties already and am applying for a 3rd . I also have several large credit cards I am unable to pay down. What can I do?

[Reply]

avatar

Abbey B Reply:

Hi Pam,

If you know in advance that you will be unable to pay your creditors, you should notify them immediately. Taking a good hard look at your expenses and figuring exactly what you can and cannot pay will give you a better idea of what steps you should take next. You may need to eliminate any expenses that aren’t necessary and put all of your available funds toward paying your most important debts (for example, cutting out cable so that you can put that money towards keeping your mortgage payments current).

Sometimes you have to make the tough decision to sell properties that you can no longer afford. A short-term drastic reduction in your expenses can free up more of your money to pay down your debts and get back in the black.

Abbey

[Reply]

avatar Carla Rodgers says:

I need help…The only thing that is hurting my credit score right now is late payment posted for a school loan….I was late three times….So I am wondering if there is anything…..

Thanks Carla

[Reply]

avatar

Abbey B Reply:

Hi Carla,

Have you tried contacting the lender and asking to have the late payments removed from your history? If you are in good standing and you only missed a few payments, it is worth a try.

You can learn more about this process here: http://www.thecreditsolutionprogram.com/educational-videos/goodwill-sample-letters/

Abbey

[Reply]

avatar Rob says:

Abbey B.

Hi. i have two late payments of 30 days in June of 2011 ( the only flaws ever on my credit report ) and i am taking your advice and writing Goodwill letters to hopefully have them both removed from my Credit Report. I have a 750 Credit Score now, but i want to be at my best possible position when i apply for a loan to build my new home. Just to be sure though, do i send the Goodwill Letters addressed to the Credit Card Banks, or do i send them individually to each Experian, Equifax, and Trans Union.

Thanks ,
Rob

[Reply]

avatar

Abbey B Reply:

Hi Rob,

You want to send the letters to whomever you are asking to remove the late charges. It seems like in your case you will asking your bank to remove the late charges.

Let us know how it goes, and good luck!

Abbey

[Reply]

avatar Malcolm Savage says:

I need help with my credit it is bad

[Reply]

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Abbey B Reply:

Hi Malcom,

Sorry to hear about your situation, but luckily you have decided to start trying to fix the issue. You should start by getting copies off all three of your credit reports to see where your score is being hurt the most. You can find out more about how to get started here: http://www.thecreditsolutionprogram.com/.

Abbey.

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