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The Hidden Cost of Credit

By
Real Estate Agent with Edwards Real Estate Group, Inc.

Last month Dustin Van Wyck from Cobalt Mortgage blogged about the hidden cost of credit, which are risk based adjustments to interest rates as a result of less than perfect credit. This is his latest post that continues on this theme as those risk based adjustments were increased AGAIN as of 1/14/11! Thank you Fannie Mae.

Recall the previous example below where we showed how Zoey Brooks' credit was costing her $5,400:

FICO SCORE 740 698
Purchase Price $450,000 $450,000
Down Payment 20% 20%
Loan Amount $360,000 $360,000
Par Rate 4.75% 4.75%
FICO Adjustment* 0 1.5
FICO Cost NA $5,400

With the pending changes taking effect on 1/14/11, this is now going to cost Zoey $6,300 AND also cost those with above a 740 FICO $900. Why is our 740 FICO applicant now paying as well? Because Fannie Mae feels that excellent credit alone doesn't eliminate risk. Fannie believes equity position is playing a bigger role in mitigating risk and they are therefore charging more for those that are putting less than 25% down for 740+ FICO scores and less than 30% down for 680-739 fico scores.

FICO SCORE 740 698
Purchase Price $450,000 $450,000
Down Payment 20% 20%
Loan Amount $360,000 $360,000
Par Rate 4.75% 4.75%
FICO Adjustment* .25 1.5
FICO Cost $900 $6,300

With these new changes, how does this affect the chart from our previous post? Changes are in BOLD:

FICO SCORE 740+ 720-739 700-719 680-699 660-679 620-659
Purchase Price $450,000 $450,000 $450,000 $450,000 $450,000 $450,000
Down Payment 20% 20% 20% 20% 20% 20%
Loan Amount $360,000 $360,000 $360,000 $360,000 $360,000 $360,000
Par Rate 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
FICO Adjustment* .25 0.5 1.0 1.75 2.5 3
FICO Cost $900 $1,800 $3,600 $6,300 $9,000 $10,800

The takeaway from this is that if you waited to lock in your rate, you had to account for these adjustments taking place. In other words, all things equal your rate became more expensive after the 14th of January. Hopefully your mortgage banker has either locked you in or made you aware of these sizeable changes.

If you have any questions or comments please feel free to comment or email Dustin directly at dustinvanwyck.com.

Show All Comments Sort:
Richard Ruggaber
Metro Life Homes - Los Angeles, CA
California Real Estate - (818) 422-5035

This is an excellent post! Thank you for sharing this information.

Jan 27, 2011 05:24 AM
Chris Miller Nevada Land with Water Rights
Vegas Grand Realty and Property Management - Mesquite, NV
Land with Water Rights For Sale

Very interesting information, maybe FICO needs revision, what do you think?

Jan 27, 2011 05:26 AM
Pat Champion
John Roberts Realty - Eustis, FL
Call the "CHAMPION" for all your real estate needs

You did an excellent job of showing the buyer just how much their credit can be affected. Thanks for going into great detail for the buyer.

Jan 27, 2011 05:26 AM
Andres Munar
Keystone Alliance Mortgage - State College, PA
Experience The Difference

Not to mention that is just the cost of getting a par rate and if they don't want to pay that fee it will cost them even more in interest!

Jan 27, 2011 05:29 AM