Most everyone knows that credit scores can make or break a person's ability to obtain financing to purchase a home. But most people don't realize how big a factor credit scoring plays in the cost of borrowing.
The Agencies, Fannie Mae and Freddie Mac, initiated Loan Level Price Adjusters (LLPA) in April of 2009. These adjusters were created to adjust for risk associated with credit score and loan-to-value (LTV). Small changes in credit score and/or LTV can mean very significant increases in closing costs or interest rate. Below is a copy of a LLPA table. The column on the left indicates the credit scores and the top row lists LTVs. You can see that there are a whopping 49 different adjustments possible!
Even borrowers with the best credit scores, those 740 or greater, are perceived to have a higher risk if the LTV is 75.01% or greater. In this example the borrower, with a loan amount of $200,000, would be levied a 0.25 point charge, which amounts to $500.
A borrower with a credit score of 699 would be hit with a 1.75 point charge, amounting to $3,500, for that same $200,000 loan amount. Looking at the lower credit scores, you can see that the adjustment can be as high as 3.25 points, amounting to a $6,500 charge!
Never has it been more important to have your financing in place before beginning your home search. Credit reports quite often have errors which can be corrected, which can increase your credit score. Often the elimination or balance reduction in an account balance will raise your credit score enough to save you thousands of dollars in LLPA fees.
If you have any questions regarding LLPA's, credit scoring, or financing your home, please send me an email or give me a call.
