Hello Valley Village and surrounding friends!
Today I want to talk about how how your credit score influences your home loan and the direct effect it has on your monthly payment.
When shopping around for a home loan, you quickly pick up on the fact that your credit score has a MAJOR influence on the interest rate you are quoted. It’s a long held practice that the higher your credit score, the lower your interest rate.
By having a higher FICO score, you have proven to the lender that you are less of a credit risk, you have previously used credit responsibly. Based on this, they assume that you will continue to be responsible and therefore are “rewarded” with a lower interest rate.
We understand that a lower score often means you are “penalized” with a higher interest rate, but the degree of that penalty is a moving target.
Currently there is a growing disparity in the rates given to those with higher and those with lower scores.
From an article from Bankrate.com…
“A recent report by the Urban Institute shows that borrowers with scores above 720 are getting mortgage rates 78 basis points lower than folks with scores below 660. In the nonbank space, the spread is wider, as high-credit scores can knock off up to 83 basis points from mortgage rates. “
A basis point is a term to describe the difference or change in interest rates. One basis point is one one-hundredth of a percent, or 0.01 percent. Therefore it takes one hundred basis points to change your rate by one percent.
“Those basis points add up fast on a 30-year fixed-rate mortgage. If you borrow $300,000 at 3.5 percent, you’ll pay $1,347 a month and total interest of $184,968. But the same loan at 4.3 percent means a total interest of $234,461. That’s a difference of $49,493.”
“Lenders have always reserved the lowest rates for borrowers with high FICO scores, but the gap has gotten wider since the pandemic.”
But why is this happening now? The answer is COVID-19 and the ballooning unemployment rate!
“Lenders are in a protective mode as unemployment numbers skyrocket. One way they can shield themselves from borrowers defaulting on their loans is to apply a credit overlay, which is an increase in standards beyond what’s required from government or GSE guidelines.”
GSEs, or Government Sponsored Enterprises, are Fannie Mae & Freddie Mac, the traditional standard setter for conforming loans.
You can read the entire Bankrate article here. https://www.bankrate.com/mortgages/credit-score-gap-widens-for-mortgage-borrowers/
In the meantime, if you have any questions, I’m here to help!
LUKE ALLEN
Realtor® - ePRO® - PSA® - SFR®
Mobile: 310.497.7754
Email: luke.jonathan.allen@gmail.com
Website: LukeAllenRE.com
Facebook: facebook.com/LukeAllenRE/
Instagram: instagram.com/lukeallenre/
License#02059886
Coldwell Banker
12930 Ventura Blvd.
Studio City, CA 91604
