The Unexpected Way Bad Credit Can Make Your Mortgage More Expensive

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According to Credit.com, a conventional loan is a mortgage originated by banks, lenders, and brokers across the country and sold on the primary mortgage market to Fannie Mae and Freddie Mac. This type of loan offers the best terms and rates due to its mass appeal and large-scale availability. However, this mortgage type also contains what’s known in banking as risk-based pricing—a premium commensurate with the risk of the consumer’s financial picture.

A conventional mortgage scenario

With a conventional mortgage loan, a borrower’s credit score is the biggest driver of cost.

If your credit score is between 620-679, you can expect to see higher costs when:

  • You’re refinancing to reduce your monthly payment.
  • Your loan size is more than $417,000 (or whatever your county’s conforming loan limit is).
  • You have less than 20% in equity/down payment.

Other factors that affect the price and rate of a mortgage include: occupancy, property type, loan-to-value, and loan program.

So let’s say your home-buying scenario looks like this:

  • Primary home
  • Single-family residence
  • Conventional loan
  • 5% down payment
  • 630 credit score
  • $417,000 loan size

Due to the lower credit score, it would not be uncommon to see an interest rate on this type of scenario approximately 0.375% higher than the average 30-year primary mortgage rate.

Also, when there is less than 20% equity or down payment (so 80% or more of the home price is being financed), the lender requires the borrower to pay a mortgage insurance premium of approximately 110% of the loan amount on an annualized basis. The borrower’s credit score also factors into the mortgage insurance premium amount for a conventional loan—the lower your score, the more you’ll pay in mortgage insurance.

For someone with a 630 credit score in this case, that might be $4,587 per year, which would be $382 per month in mortgage insurance.

 

To learn more go to:

http://www.realtor.com/advice/finance/the-unexpected-way-bad-credit-can-make-your-mortgage-more-expensive/