Everyone wants to have good credit to secure the best interest rate for mortgage loan financing. Credit scores range from 500 to 800, although we’ve seen credit scores as high as 820 before. Despite the fact that getting a mortgage today involves showing full income, full assets and a complete credit history, the need for an 800 credit score is simply not necessary for getting the best possible combination of rate and costs with home loan financing.
In fact, you never needed an 800 credit score to get a mortgage loan. Granted, to achieve an 800 credit score, you’ll have bragging rights, but it will have no bearing on the score itself whether you have an 800 credit score or credit score 720 or higher.
An 800 credit score represents a clean credit risk to a mortgage lender when getting a home loan.
Let’s get one thing straight. An 800 credit score is quite an achievement, but that’s all it provides, just bragging rights. For the purposes of getting a home loan, the middle credit score needed is 720 or better for the best possible premium financing available.
For example let’s say you’re looking financing a mortgage loan in the amount of $300,000. If you’re middle credit score is 720 or above you avoid a credit score adjustment of 50 basis points. Put another way, you avoid paying $1500.
Same scenario, if your credit report reveals a middle credit score at 719, you’re final mortgage interest rate will be adjusted by 50 basis points. The adjustment can come in two ways. Influencing the interest rate higher to offset the risk based pricing charge. Or securing a lower rate of interest in exchange for paying the upfront overhead for having a lower credit score. If you choose this route, under the discount points line item on a final closing statement, it show a charge in the amount of $1500. This is mortgage finance 101 when it relates to risk based pricing.
The same pricing applies to purchasing or refinancing a Sonoma County Mortgage. Here’s a breakdown of credit score mortgage pricing:
>720 no adjustment to pricing
<720 -700 100 basis points to pricing =1 discount point
<699 and below 175 basis points pricing = 1.75 in discount points
This mortgage loan pricing is based on 20% equity conventional financing. So in other words, 80% loan to value risk-based pricing. If the loan to value drops to say 70%, the loan to value the risk-based pricing also the drops as well. Each scenario is dropped by 50 basis points.
<720 -700 50 basis points to pricing =.5 discount point
<699 and below 125 basis points pricing = 1.25 in discount points
As as the loan to value on a purchase or refinance mortgage increases, the credit score adjustments cost more. As the loan to value decreases, the credit score adjustments cost less. Mortgage lenders structure loans in this fashion to minimize investment risk when creating a mortgage loan to be sold in the secondary market. Wall Street has a certain appetite for risk and the more risk they take, the bigger the premiums they charge as a result of making those risk allowances.
If you are seeking a mortgage loan and don’t have 800 credit score, know-how mortgage lenders or get a look at your scenario.
They will use this risk based pricing when quoting you an interest rate on a mortgage loan for a primary residence second home or investment property. Additionally, there will be further risk based pricing adjustments to your mortgage loan if the occupancy is anything other than a primary residence. This is precisely why investment property mortgages cost more.
Here’s what to do if you do not have an 800 credit score:
- Figure out what’s causing your credit score to be lower-it might be one or two small debts that can otherwise be repaired quickly
- If you have credit cards, are the balances over 30% of the total allowable lines? If they are, they could be putting artificial pressure on your credit score and as a result, your credit score could be lower. Call up your credit card companies and ask them to increase your credit lines or pay down your principal balances.
- What’s the mix of credit that you have? Is it comprised of store credit cards, generic credit cards such as Discover or is it a combination of the two or supported by other revolving debt? Sometimes merely adding a credit line to a credit report can increase your credit score upwards of 20 points. Increase your credit score 20 points to avoid a risk-based premium adjustment might not be such a bad thing considering interest rates are presently at their historical lows.
Get in in touch with a local mortgage lender today. Get a complementary mortgage rate quote, based on your credit score. Remember you don’t need to have an 800 credit score for getting a home loan.