How are Mortgage Interest Rates Determined II
February 16th, 2007 Categories: Mortgage News
To continue my series about the main credit risk factors that effect mortgage interest rates, I move on to part II: Credit Score.
Credit scoring and its effects on mortgage rate pricing are also highly misunderstood, mainly due to misinformation provided by mortgage professionals. Earlier in my broker days, we loved to receive a lead that had no clue what their credit score or overall rating was. For example, if a borrower thought they had ‘fair’ credit and turned out to have a 682 middle, it was open season n pricing that lead.
IT IS VITAL THAT YOU UNDERSTAND YOUR WHOLE CREDIT PROFILE, NOT JUST YOUR SCORE. Score alone is not the end all be all to mortgage qualification but…What is a good credit score when it comes to mortgage qualification? It highly depends on who you ask, but the overall perception seems to be that if you don’t have at least a 700+ FICO, your credit is less than good. This couldn’t be further from the truth. In fact a 640 FICO may be all one needs to qualify for the best rates and terms.
For example, a borrower may have a 700 FICO but only has 3 accounts open, none for more than $3000 in high credit. Another borrower may have a 645 with 15 accounts, 6 open, 9 closed, one account is a mortgage another is a car, the rest are credit cards with relatively moderate balances related to available credit.
The 645 FICO borrower will qualify for better terms than the 700 borrower (assuming neither have been 30+ days late on any accounts, debt to income ratios fall in line, etc). Credit depth is a very important important aspect of the overall picture. It takes a pretty experienced mortgage pro to be able to read and interpret the innards of a credit bureau. There is so much to consider that many lenders have created Automated Underwriting Engines (AUE) to remove stupid from the qualification process. A broker/banker is required to input from the ‘1003′ mortgage application to the AUE:
- Income, Assets, 2yrs chain of employment, 2yrs rent and/or mortgage history, loan amount, purchase price (or appraised value on a refi), property type & use, as well as a few other obvious factors. See part 1
- The 3 major credit bureau’s (Experian, Equifax, and Trans Union) are merged together and uploaded into their system as well, for an automated ‘decision’. Also…lenders will typically use the middle of the 3 scores (or lower of 2)…
What is important to understand is that credit scoring has evolved into a mathematical equation called an algorithm. If it’s math, a PC by processor can make sense of this complex equation in seconds with next to no chance for error. Alas there hasn’t been a 100% conversion to these types of systems so the ‘misquote’ the human still exists. The key to understanding credit when applied to the mortgage industry is that its all open to interpretation…score isn’t everything. This is a general key that you may go by, although certainly not perfect, it should allow a better perspective of what score only will generally qualify you for:
- 580> Improve your score or you’ll pay through the nose. Financing is available but be careful, sharks rule this section of the mortgage pool.
- 580-619 For all practical purposes this is Sub-Prime land and rates are generally not so good. 100% financing is available if you fully document your income at the lower end of this scale, with rates improving as the FICO score does.
- 620-659 The lower end of this scale is where Conforming Loan minimum qualifications begin. One shall need to demonstrate low debt to income ratios and total asset values in excess of 6 months worth of pending mortgage payments.
- 660-679 Score above a 660 indicate good credit. Stated income and other low documentation loans are readily available in this range without getting ‘hit’ too hard. A ‘hit’ is pricing for the worse, i.e. when compare to a fully documented income loan, a lower documentation type will cause the qualifying interest rate to get hit (or increase by) .125% to .5%, depending on the lender and other factors.
- 680-699 These are solid scores and where the average national score resides in. Some lenders will even price for the better with FICO’s in this range.
- 700-719 FICO’s above a 700 are where you want to be. Rates are great and exceptions are made for borrowers who may fall just short in another area like maximum debt to income ratio allowances.
- 720-739 More exceptions and smoother qualification processes await the borrower who has scores in this range. Some lenders will even waive income and asset documentation requirements for FICO’s in this range.
- 740+ It’s all pretty much the same above a 740 FICO. Exceptions are abundant, documentation requirements are at a minimum, even if you can prove it all or don’t need them. Lenders will bend over backwards to get your business and may even price rates better yet.
There are a number of different sources out there to help one better understand how credit scoring works in a vacuum (reading books and blog posts) as well as intuitive interfaces that use your own bureaus information. They cost around $15-$20 and cut the time to understanding how specific actions like closing an account, running up a credit card, buying a car, etc. can impact your credit score. Its better to play pretend than make a costly decision. You may even find that your FICO can be improved in 30 days or less enough to make a substantial difference in the the mortgage rate and program you will then qualify for.
Contact me (jeff.corbett@gmail.com) and ill put you in touch with a provider of such services near you 
Peace…Im out…X
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