mortgage

Can a low credit score sink your mortgage?

Highlights
  • Consumers need good credit scores to get top mortgage rates.
  • Risk-based pricing determines how much you'll pay.
  • Borrowers with poor credit should consider FHA loans.

Does a low credit score mean you can't get a home mortgage?

Since 2007, when Freddie Mac and Fannie Mae introduced "risk-based pricing," consumer credit scores have played an increasingly pivotal role in the mortgage application process.

"Fannie Mae and Freddie Mac looked at credit scores and loan performance and realized that borrowers with lower credit scores are far more likely to default on their loan than borrowers with higher scores," says Douglas Benner, a senior loan officer with Embrace Home Loans in Rockville, Md.

How credit score changes mortgage payment
Credit scoreRate*Monthly payment
on $300,000 home
760-8504.072 percent$1,445
700-7594.294 percent$1,484
680-6994.471 percent$1,515
660-6794.685 percent$1,553
640-6595.115 percent$1,632
620-6395.661 percent$1,734
*As of Sept. 14, 2010
Source: MyFICO.com/Informa Research Services

As a result, credit score requirements are now stricter. Consumers need high scores to qualify for the lowest mortgage rates, says Gibran Nicholas, chairman of The CMPS Institute, an organization in Ann Arbor, Mich., that trains and certifies mortgage bankers and brokers.

"Consumers with a score as low as 620 can sometimes qualify for conventional financing, but they will pay a higher interest rate and points," Nicholas says.

What's a good score?

FICO generates the most widely used credit scores, which are based on credit reports from three credit reporting agencies: TransUnion, Equifax and Experian.

"FICO scores rank-order consumers by how likely they are to pay their credit obligations as agreed," says Craig Watts, public affairs director for FICO.

Nicholas says a credit score of 740 is the threshold for qualifying for the best interest rates from conventional mortgage lenders.

"Typically, risk-based pricing tiers shift about every 20 points. So if your score is 680, you may need to pay 1.5 points at the closing or a higher interest rate," Nicholas says.

"If your score is 640, you will need to pay 3 points at the closing. On a $400,000 loan, that means you could need $6,000 or $12,000 extra."

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Consumers can choose to pay points or a higher interest rate.

Benner says borrowers with a score in the mid-600s will likely pay 0.75 percent higher interest than the lowest current rates.

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