Your FICO credit score is the single most important factor when it comes to determining both your mortgage interest rate and how much home you can buy. A low credit score can increase your mortgage interest rate and your mortgage insurance cost as the result of a government program based on “risk-based pricing.” Officially, it's known as the Loan-Level Pricing Adjustment (LLPA) program, implemented in 2010.
Under this program a fee is assessed on conventional (not FHA or VA) mortgage loans with credit scores under 740 and down payments under 10%. Loans for borrowers with lower credit scores and smaller down payments are assessed higher fees, resulting in higher interest rates. FHA and VA loans have more level rates but higher fees.
The calculation of that fee and how much it increases your interest rate happens behind the scenes. As a borrower, you’re only told what your interest rate is, not how the lender arrived at it.
Every 20-point reduction in credit score can increase your monthly mortgage interest expense and significantly increase the monthly cost of private mortgage insurance (PMI).
The chart at right shows the increased cost of a 30-year $400,000 mortgage with a 5% down payment, when the buyer has less than a 740 credit score.
Web-based loan calculators don’t factor in your credit score, so you’d be smart to speak with a loan officer such as Bruce Gustafson of Universal Lending Corp., who advised me as I did my research for this column. You can reach him at 303-596-0780. Bruce is an expert in the process of increasing your credit score to lower your rate. You should never seek out a “credit repair” company for this process. Bruce and other loan officers trained in raising credit scores don’t charge for their service because they’re working to qualify you for a loan, which is where they make their money. Also, credit repair counselors typically work on settling your debts for less than what you owe, but Bruce warns that paying off an older collection (e.g., medical or cell phone) can serve to refresh negative data and actually lower your credit score.
Published Feb. 23, 2017, in the YourHub section of the Denver Post and in four Jefferson County weekly newspapers.