When it comes to shopping for a mortgage, your credit score holds major influence over the loan fees you must pay. Loan-level price adjustments, or LLPAs, are fees charged by Fannie Mae and Freddie Mac, the two government-controlled entities that purchase mortgages from lenders.
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On rare occasions -- when you offer an exceptionally large down payment -- a price adjustment could save you money, but "most adjustments are costs," says Michael Becker, a branch manager with Sierra Pacific Mortgage in White Marsh, Maryland. Prospective borrowers can pay them upfront as "points." ( Each point costs 1 percent of the mortgage amount.) Alternately, they can choose a higher interest rate to offset the fees.
Base pricing will vary slightly by lender depending "on their margins and their volume and how hungry they are for business," says David Kuiper, vice president of mortgage lending at Northpointe Bank in Holland, Minnesota.
The chart breaks down the loan-level price adjustments by credit score and loan-to-value ratio in use by Fannie Mae. Negative numbers are credits; positive numbers are costs:
Source: Fannie Mae
Generally speaking, "the lower your credit score, the greater the cost (of the mortgage)," Becker says. The LLPAs increase or decrease at 20-point credit score intervals and "anyone within each interval or level will get the same rate," Becker says.
A score of 740 generally qualifies you for the best adjustments -- so there's no pressing need to move the needle much higher before you hit the mortgage market. Conversely, you probably won't qualify for a mortgage with a credit score less than 620, given Fannie Mae and Freddie Mac aren't likely to purchase those loans.
To help you understand the value of your credit score, popular scoring model FICO provides on its website estimates of how these adjustments by credit score translate into rate differences.
Based on Bankrate's national interest rate survey, a consumer with a FICO score between 680 and 699 trying to borrow $300,000 in early April would have qualified for a 3.709 percent rate on a 30-year fixed mortgage, resulting in a $1,382 monthly payment. In comparison, a consumer with a FICO score between 620 and 639 would have qualified for a 4.899 percent rate, resulting in a $1,592 monthly payment.
Many mortgage brokers will often try to help you improve your score so you can move up a tier and qualify for a lower adjustment.
For instance, they may look at the utilization rate you have on certain credit cards and say "pay this down to $1,850," Kuiper says. After you do so, the broker will have your credit score pulled again.
This process is known as rapid rescoring, and generally, it will cost roughly $50 for every account on your credit report that needs to be addressed.
Keep in mind: LLPAs are triggered by more than just your credit score. Other factors affecting the overall cost of your loan include your down payment, the type of property you are trying to buy, the intent of the loan (whether you're purchasing a house or refinancing) and the term (or length) of your loan.
If you want to eliminate the fees altogether, choose a shorter loan. LLPAs don't apply to loan terms of 15 years or less.
To keep down loan costs, it pays to comparison shop. You should also burnish your credit before you hit the mortgage market. To improve your credit score, check your credit report for errors, address any delinquent accounts, pay existing debts and avoid applying for other loans.
Given the absence of a plastic-centric Fannie or Freddie, credit card underwriting is a lot less set in stone.
"Each lender has a slightly different policy," says Eric Lindeen, director of marketing at Zoot Enterprises, which provides credit solutions to large financial institutions. "There are going to be differences in the rates that banks offer."
Some issuers outline a broad range of annual percentage rates, or APRs, in their terms and conditions. A prospective consumer can qualify for any rate in that spectrum. Others will specify rate tiers.
"It's a lot easier to have those established (tiers)," says Brian Riley, senior research director at advisory firm CEB TowerGroup. The set rates expedite the underwriting process since issuers can just go through applications and "chuck them into piles quickly," he says.
To give you an idea of the value of a good score in the credit card marketplace, Lindeen provided the following estimates for a popular tiered APR rewards credit card offering.
If you carry a balance, qualifying for the lower rate could save you hundreds of dollars in interest payments. Let's say, for example, you have a $1,000 balance and make the minimum payment each month. With a card that charges 12.99 percent APR, you'd pay $297 in interest and pay off your debt in just over five years. In comparison, if your credit score qualified you for a card that carries a 22.99 percent APR, your interest payments shoot up to $715, and it would take you nearly seven years to pay off the balance.
When your score gets below the 600 mark, you may still qualify for a credit card, but it's likely to be a secured product.