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.
“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.”