While it has always played a big factor in the approvability and/or interest rate assessed to a mortgage, recently, credit scores have taken on an even bigger role in the mortgage process.  Fannie Mae is now incorporating Loan Level Pricing Adjustments based SOLELY on a borrower's FICO score! A credit (FICO) score is a 3-digit number that is used to evaluate the risk associated with lending you money.  A FICO score is generated by a mathematical model created by Fair Isaac and Company in the 1950's.  When you apply for a mortgage, the mortgage company pulls a "Tri-Merge Credit Report" and uses your middle score for determining risk.  A tri-merge report means that it is pulling from all 3 of the credit bureaus: Experian, Transunion, and Equifax.  Scores can range from 350 to 850. A score of 720 or higher is considered excellent; a score of 680 to 719 is considered good; a score of 620 to 679 is considered fair, and a score of 619 or less is considered poor.  As I stated above, it is used to determine the risk associated with lending you money. As you can see from the following table, different credit scores historically have different risk.  This is why the lower the score, the higher the rate when you borrow money: 

 A score of less than 619 can actually give a buyer 12-28% less purchasing power due to the fact that the interest rate on this mortgage will be higher than on a borrower with the exact same income, the exact same debts, the exact same mortgage amount, and a credit score of 760 or higher!  You can also end up paying upwards of $300,000 more in interest costs over the life of the loan (based on a 90% loan on a sales price of $400,000).   What's the damage of lower credit scores?

Home Financing:  A 30-Year Fixed with a loan principal amount of $360,000* 

 If your score improves to 720-850, you could save an additional $318,32 

If your score improves to 700-719, you could save an additional $308,047

If your score improves to 675-699, you could save an additional $263,094

If your score improves to 620-674, you could save an additional $163,422

A borrower who increases his or her credit score from 620 to 720+ can potentially save $884 per month on mortgage payments, $10,608 per year, and approximately $318,329 over the life of the 30-year loan.

 Fannie Mae's Loan Level Price Adjustments are as follows and this is why it's vital to have your credit in order before buying a house - these are for70% or higher "loan to value" mortgages (0-30% down on a purchase):

               Credit Score         Pricing Adjustment (Will Affect Points and/or Rate)                        

                Under 620                                             2.00%

               620- 639                                                1.75%

               640-659                                                 1.25%

               660-679                                                 0.75% 

What makes up your credit score?  35% is your payment history, 30% is based on the amount you own, 15% is based on the length of your credit history, 10% is based on new credit and the number of recent inquiries, and the remaining 10% is based on the types of credit used.  I will go into this more indepth in next months' article. It is extremely vital that you start to work BEFORE you intend to purchase a house to get yourself in the best position to get the most purchasing power and the lowest total monthly cash outlay (payment).  At Northstar Mortgage, we have someone on staff that is proficient in helping our clients to increase their credit scores, in some cases up to 100 points, in a short time. If you are thinking of purchasing real estate and aren't sure of how your credit looks, or if you know that it needs work to get into an approvable condition, please be sure to contact your mortgage professional ASAP to get started on this!