UNDERSTANDING THE CREDIT SCORE IMPACT ON HOME LOAN INTERST RATES

myhomeloanplan on June 14, 2023

Introduction

If you’re considering applying for a mortgage , it’s important to understand the significant influence your credit score can have on the mortgage rate you’re offered. In this blog post, we will explore how the credit score affects the relationship between interest rates and your overall loan costs.

Before we delve into the details, let’s establish some key assumptions that will be used to illustrate the impact of credit scores on your mortgage rate.

We will assume a property value of $750,000 and a loan amount of approximately $500,000.
The focus will be on comparing FICO credit scores of 720 and 660. It’s important to note it should be a FICO score because the credit reporting agencies have their own credit scoring models that can produce similar scores. Know which score is on your credit report.
For this analysis, we will consider a rate and term refinance for a conventional mortgage, which is guaranteed by Fannie Mae or Freddie Mac.
Additionally, we will assume a 30-day lock-in period and a 30-year fixed-rate mortgage.
Our example will revolve around refinancing a single-family residence.

Keep these assumptions in mind as we explore the numbers.

Now, let’s take a look at a rate sheet based on the aforementioned assumptions, with a particular focus on a FICO score of 720.

It’s essential to note that the range between 3.25% and 3.375% represents a critical break-even point. This is the threshold at which you transition from receiving a credit from the lender to having to pay points.

The credit is used to offset any closing costs associated with the loan transaction. As you move up from 3.375% to 4.125%, you’ll notice various credits available, such as $7,400 at 4.125% and $5,700 at 3.875%.

However, when you move down from 3.25%, you not only pay for your closing costs but also incur bonafide discount points or points. These terms essentially refer to the amount you must pay upfront to secure a loan at a specific interest rate.

For instance, at 3.25%, you may be required to pay $1,790 in addition to other affiliated costs. The relationship is clear: as rates increase, you receive more credits, but as rates decrease, you may need to pay points to secure the desired rate.

Now, let’s shift our focus to the impact of a FICO score of 660 on mortgage rates.

Looking at the table, you’ll notice that the break-even point has shifted upward when compared to a FICO score of 720. Instead of receiving a credit at 3.375%, the last of the credits now occurs at 3.75%.

This shift means that individuals with a 660 score will face higher rates compared to those with a 720 score. The basis for this discrepancy lies in the fact that at 3.375%, a borrower with a 720 score receives a credit, whereas someone with a 660 score will not. This disadvantage is a direct result of the 60-point drop in the credit score.

Key Takeaways

It’s worth noting that a drop in credit score can have additional financial implications beyond the interest rate itself. For example, let’s consider an interest rate of 3.125%. For an individual with a 720-credit score, the cost is slightly over $4,400. However, for someone with a 660-credit score, the 60-point drop in score translates to an additional cost of $4,000. This example underscores the importance of maintaining a good credit score to minimize the financial burden of a mortgage.

It’s crucial to understand that while both individuals in our example are eligible for the same interest rates, the difference lies in the amount of credit or points required to secure their desired rate.

It is a common misconception that individuals with a higher credit score above 720 will never have to pay points. In reality, circumstances may vary, and even borrowers with higher credit scores may need to pay points, albeit possibly fewer points compared to those with lower scores.

Conclusion

In conclusion, your credit score plays a significant role in the interest rates you are quoted when applying for a mortgage. A lower credit score can lead to higher rates, resulting in increased costs over the life of the loan. It’s crucial to carefully evaluate the costs associated with different interest rates and credit scores before making any decisions.

By understanding how credit scores impact mortgage rates, borrowers can take steps to improve their creditworthiness and secure more favorable terms on their mortgage. Remember, even with a credit score above 720, there may still be circumstances where points need to be paid.

Take the time to review your credit score along with your credit history, consider credit-building strategies, and work towards achieving the best possible terms for your home loan.

If you found this information valuable and want to discuss your scenario, please consider scheduling a free consultation.

Documents Needed For A Mortgage Approval Letter: A checklist

myhomeloanplan on August 15, 2022

Documents Needed For A Mortgage Approval Letter: A checklist

When you are applying for a mortgage, the lender will need certain documents from you to approve your loan. This can seem like a daunting task, but if you know what they are looking for, it can be a lot easier. In this article, we will list all of the documents that are typically required for a mortgage approval letter. By knowing what to bring with you when you go to meet with the lender, you can speed up the process and get one step closer to owning your home.

What is a mortgage preapproval?

A mortgage preapproval is a letter that shows how much money you can borrow from a lender. It also shows the interest rate, loan terms, and conditions that you qualify for. This letter is based on information that you provide to the lender, such as your employment history, income, debts, and credit score. The pre-approval letter is not a guarantee that you will get the loan, but it does show that the mortgage lender is willing to work with you. The documents you will need for a mortgage preapproval are as follows::

-Photo ID

-Employment verification letter from current employer

-Tax returns from the last two years

-W2 forms from the last two years

-Pay stubs from the last two months

-Bank statements from the last two months

-List of debts and asset information

These are just some of the documents that you may need to provide to the lender. The exact list will vary depending on your situation. If you have any questions, be sure to ask your loan officer for more information.

Preapproval Vs. Prequalification

When you are shopping for a mortgage, you may come across the terms preapproval and prequalification. These two terms are often used interchangeably, but there is a difference between them. Prequalification is when the lender gives you an estimate of how much money you could borrow based on information that you provide to them. This is usually done over the phone or online and does not require any documentation. Preapproval, on the other hand, does require documentation. The lender will look at your employment history, income, debts, and credit score to determine how much money they are willing to lend you. They will also set the interest rate and loan terms based on this information. Getting pre-approved for a loan can give you an edge when you are bidding on a home. It shows the seller that you are a serious buyer and that you have the financing in place to purchase their home.

If you’re applying for a mortgage it’s a good idea to prepare your financial documents in advance.

This will help the process go more smoothly and avoid any delays. In this article, we’ve listed some of the documents you’ll need to provide to your lender. These include employment verification, tax returns, bank statements, and asset information. By knowing what’s required ahead of time, you can streamline the mortgage application process.

Photo ID

The first thing you’ll need to provide when you apply for a mortgage is a photo ID. This can be your driver’s license, passport, or state ID. The lender will use this to verify your identity and make sure you are who you say you are.

Employment Verification

The next thing you’ll need to provide is proof of employment. The lender will want to see that you have a steady income and that you can repay the loan. They will usually ask for an employment verification letter from your current employer. This letter should state your position, salary, and date of hire. The lender may also ask for W2 forms from the last two years or pay stubs from the last two months.

Bank Statements

You will also need to provide bank statements from the last two months. The lender will use these statements to verify your income and assets. They will also look for any red flags, such as large deposits or withdrawals.

Asset and Debt Information

In addition to your income and employment history, the lender will also want to see what assets you have. This can include savings and checking accounts, and investment account statements. The lender will use this information to determine the source of your down payment and your ability to repay the loan. They will also want to see a list of your debts, such as credit cards, student loans, and car loans. This information can normally be obtained from a credit report that is pulled by the mortgage lender. Also, the information from the credit report provides a glimpse into your credit history and how you have paid back other creditors. The lender will use this information to determine how much of a risk you are.

Pay Stubs

The lender will also need to see your most recent pay stubs. This is to verify your income and employment status. The pay stub should show your year-to-date earnings, as well as any deductions that have been made.

Tax Returns

A tax return is a document that you file with the IRS each year to report your income and deductions. It is also used to calculate your tax liability for the year. You can use your tax return to claim certain tax credits and deductions, which can reduce your taxable income and save you money. The lender will also need to see your tax returns from the last two years. This is to verify your income and make sure you are paying your taxes. The lender will also use this information to determine if you are self-employed or have any other sources of income.

W-2s

A W-2 is a annual form that employers use to report wages and taxes to the IRS. It shows your taxable income, Social Security and Medicare taxes withheld, and other information. You will need to provide a copy of your W2s from the last two years when you apply for a mortgage. This is to verify your income and tax status.

Other proof of income

If you have other sources of income, such as child support or alimony, you will need to provide documentation of this income. This is to make sure that the lender has a complete picture of your financial situation.

When you are applying for a mortgage, the mortgage lenders will need certain documents from you to approve your loan. This can seem like a daunting task, but if you know what they are looking for, it can be a lot easier. In this article, we have listed all of the documents that are typically required for a mortgage approval letter. By knowing what to bring with you when you go to meet with the lender, you can avoid any delays in the process.

What is a mortgage preapproval? A mortgage preapproval is when the mortgage lender reviews your financial information and decides if you are eligible for a mortgage. They will give you a preapproval letter telling you how much money they are willing to loan you. This is not a guarantee that you will get the loan, but it is an indication that you are likely to be approved.

Preapproval Vs. Prequalification: There is a big difference between preapproval and prequalification. Preapproval means that the lender has reviewed your financial information and has decided that you are eligible for a mortgage. Prequalification means that the lender has just looked at your credit score and determined that you might be eligible for a mortgage. It is important to note that being preapproved does not mean that you are guaranteed to get the loan – it just means that you are more likely to be approved than if you were only prequalified.

If you’re applying for a mortgage, it’s a good idea to prepare your financial documents in advance. The lender will need copies of your pay stubs, bank statements, and tax returns. They will also want to see your photo ID and information about your assets. By gathering all of this information ahead of time, you may avoid any delays in the home buying process by following these steps.