November 6th, 2019 8:19 AM by Jackie A. Graves, President
When home shoppers
are looking around for the best mortgage rates, they may wonder why they aren’t
quoted the ones they see advertised online or by banks. Lenders usually
advertise the best interest rates that are available only to their borrowers
with the highest credit scores.
scores can have a big impact on what borrowers are quoted with mortgage rates.
paints the following scenario in a recent article: Two neighbors are both
applying for a $300,000, 30-year fixed-rate mortgage. The only difference is
one has a credit score of 750 and the other has a credit score of 620. In
that scenario, the borrower with a 750 credit score may be able to get the
3.75% advertised rate with a $1,390 per month mortgage payment. On the other
hand, the borrower with the 620 credit score may be quoted a 4.50% interest
rate with a $1,520 per month mortgage. The difference in payments is $130 more
per month and a 0.75% higher mortgage rate.
borrower can still get a lower interest rate, but they would need to pay
extra for it. In order to get the 3.75% interest rate that the other borrower
gets, that borrower would have to pay points to buy the 4.50% rate down to
3.75%. That could cost anywhere between $3,000 to $6,000, but could offer
thousands of dollars in savings over the life of the loan.
use a risk-based pricing to determine the interest rates to quote borrowers.
Credit scores are weighted heavily. Lenders will offer the same exact loan to a
person with a higher credit score at a lower interest rate because they view
them as lower risk. On the other hand, the Consumer Financial Protection Bureau
defines its risk-based pricing with higher risk borrowers who have a lower
credit score and they will likely be quoted a higher interest rate.
a few helpful articles to pass along to your borrowers for
improving their credit scores:
Tips for Clients to Reach Their Best Credit Score
7 Common Credit Report Mistakes
Help Clients Improve Their Credit
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