Today’s lowest mortgage rates and fees go to borrowers with credit scores of 740 or higher. This is a change from a few years ago, when a 720 credit score was good enough to merit the best deals. As a result, some homebuyers and refinancers might be caught by surprise.
Fannie Mae and Freddie Mac charge extra fees to borrowers with credit scores between 720 and 739. The fees are higher for borrowers with credit scores of 700 to 719, and they continue to kick higher for every 20-point drop.
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“What used to be great is now only good,” says mortgage broker Todd Huettner, president of Denver-based Huettner Capital. “I have clients all the time who literally wind up with a score of 739, 719, 699, 679 … and it costs them money to either fix it or pay for it.”
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Huettner cites the case of a client whose credit score dipped below 740 because she put a washer and dryer on a store credit card. The purchase maxed out her available credit on the card and caused a 20-point drop in her credit score, he says.
Pitfall of co-signing
Another lender, Luxury Mortgage Corp., had a client who wanted to refinance. The borrower had sufficient income, assets and personal credit history. But he had co-signed an auto loan for his son, and the son hadn’t been making payments on time. The father’s credit score took a hit.
“As a result, the borrower, who otherwise met every other criterion, was unable to refinance the loan at a rate that made economic sense,” says David Adamo, CEO of Luxury Mortgage.
Taking action on your score
What can a homeowner who wants to refinance do with a good FICO score that’s not good enough?
“Virtually everyone can raise their scores by at least 10 to 20 points, sometimes significantly more, in 30 days,” says Rodney Anderson, a lender in Plano, Texas. Here’s what to do.
- Find out what might have gone wrong. Applicants should know their credit score, understand what it means to their loan rates and ask their loan officers to use credit analysis on their behalf, says David Chung, managing director of CreditXpert. Credit analysis tools are a simple way to identify key score influencers by scrutinizing the information contained in each of an individual’s three credit reports to look for inconsistencies, errors and omissions that may artificially depress the score.
- Correct any inaccuracies. Although consumers can improve scores on their own, credit agencies offer services to mortgage brokers to help consumers raise their credit scores if something is reported inaccurately and there is proof of a discrepancy.
- Decrease the percentage of available credit used. This can be done by paying down balances or increasing credit limits.