“Why can’t I get the interest rates I see advertised on the Internet.” One of the most important characteristics of securing a mortgage is your Fico Score. Simply put, the lower the credit score higher the interest rate.
How Your Fico Score rates is what determines both your eligibility for the mortgage as well as the interest rate that you’ll be paying throughout the term of the loan. For example, consider the following scenario as a guide to see how credit score impacts indebtedness. Notice the interest costs as it pertains to mortgage interest in each of the following scenarios.
Based on a loan amount of $285,000..
Assuming a 5% down/5% equity (95% loan to value) financing with a conventional mortgage on a primary residence 740 Fico Score
Mortgage Rate 3.625% with no points
→Total interest paid on a term of 360 months $182,909
Same assumptions with a 700 Fico Score
Mortgage Rate rises to 3.875% as an assessment of risk with 40 point drop in credit score
→Total interest paid on the 360 months $197,463
Same assumptions with a 680 Fico Score
Mortgage Rate rises to 4.125% with a 60 point drop in credit score
→Total interest paid on 360 months $212,251
*Mortgage Tip: For every 40 point swing in credit score purchasing or refinancing, the interest rate rises upwards of a half of a percent based on Fico Score alone, all other factors constant.
Your ability to get a mortgage changes beyond just your Fico Score, other factors are considered in the lender’s decision to extend credit.
The lower the Fico Score, the more emphasis is placed on the other components of getting a mortgage including debt, income,and assets.
Here’s a basic model in order of priority:
→Fico Score equal to or greater than 740——————assets, debt, income
→Fico Score less than 700————————————- income,debt,assets
→Fico Score less than 680————————————–debt,income assets
Imagine a scale with credit, debt, and income on one side and assets and loan to value on the other, the side with credit, debt, income will always be a larger weighted factor than assets and loan to value.
If you plan on comparing mortgage loans with a few different lenders, be prepared to tell each lender your whole story up front and give them a realistic picture of what your Fico Score is if you don’t want your credit pulled. This allows the lender to make all the factors work, so you know what your shopping for.
The score becomes a critical factor as lenders use credit to predict default risk. Credit, Debt, Income and Assets are reviewed on a weighted risk scale to determine the pro’s and con’s of making that home loan. The more risk the lender absorbs, the costlier the mortgage, conversely, the more risk you absorb borrowing the money, the better the terms are for you as a borrower (hence why adjustable-rate mortgages are substantially lower cost mortgages).
If you have a question about eligibility for a loan program or like to better understand how your loan scenario will play out, feel free to contact us. How your Fico Score affects your ability to get a mortgage lies between what your score is and how it plays into income, debt and assets.
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