Plano MortgageMost people have heard the term FICO score, but some remain confused as to what it actually is and if it affects them when they try to obtain a mortgage. A few questions can be answered to help people understand how it can affect the amount of interest you pay on your loan.

What is a FICO Score?

A FICO or CREDIT score is a credit grade of a borrower, based on credit history as reported to 3 separate credit reporting agencies. It is based on a number of factors, including the amount of credit a person has, payment history, late payments, judgments, loan defaults and other factors.  There are hundreds of different credit scores developed for different industries for consumers.plano mortgage rates

A mathematical formula developed by Fair Isaac Corporation (thus the term FICO) is used to grade the credit risk the borrower represents. Scores range from 350 to 850. A score of 650 or better is considered good and a score above 750 is considered very good.  There are other credit score formulas used, with FICO being the most popular…Equifax uses BEACON, and TransUnion uses FICO Risk Score Classic for mortgage scores.

Plano Home LoansDoes a FICO Score Affect a Mortgage Rate?

Mortgage interest rates are calculated in part, on the amount of risk the borrower represents. The higher the risk (that means the credit score is LOWER) the borrower presents, the higher the interest rate the lender must charge to account for the risk. With FICO scores, the lower the score means a higher risk, and thus, less favorable mortgage terms. Those with low FICO scores may have difficulty getting a mortgage loan approved.

How much the rate will change depends on the lender. Myfico.com estimates that with current rates, a borrower with an average FICO score can expect to be charged more than 1.5 percentage points more than a borrower with an excellent score. Though the difference in interest may not seem to be much, it will add up over time.

For example, a borrower seeks a $200,000 mortgage on a 30 year fixed rate. Because they have an excellent credit score, they obtain a mortgage at 3.549%. Monthly principal and interest payments at that rate amount to $904 per month. Total interest paid on the loan will be $125,285 over the 30 year period.

Another borrower seeking the same mortgage has a lower credit score, in the average range. Thecredit score borrower is offered the same mortgage but at 5.138% interest. The monthly payment will be $1094 per month and the borrower will pay $192,607 in interest. The difference in this case, between an excellent FICO score and an average score is $187 per month, $67,302 over the life of the mortgage.

Is a FICO Score Permanent?

No. A credit score will change depending on the borrower’s credit history and it will change each time the consumer’s credit profile is updated – usually monthly. A borrower with a lower score can increase it over time by taking certain steps to improve it. Finding out what their credit report/credit score is, is the first step to improvement. It should be reviewed for accuracy, and incorrect entries should be reported. Outstanding judgments, if any, should be paid. Paying down revolving credit card debt also can help.

Plano Home LoanHaving a conversation with Warren Whitaker, an experienced mortgage professional,  to discuss current FICO score is another good start. Warren can discuss the effect it has on your mortgage rates and how to improve your score and put a borrower on the path to obtaining the best mortgage rate possible. Give Warren a call at 972.523.8353 to get started.

RESOURCES

How Credit Scores Impact Your Mortgage Rate

How does my credit score affect my ability to get a mortgage

How Do Mortgages Affect Your Credit Score?

Does Buying a House Improve Your Credit Score?

How your credit score affects the cost of borrowing

 

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