Keeping Score: The New Rules for Credit Scores and Mortgage Risks

Fannie Mae and Freddie Mac, the nation's two largest buyers of home mortgages, recently enacted changes in how they use credit scores to assess risk and price loans.  If you have excellent credit so you think this may not affect you, think again!  The latest announcement will affect borrowers with scores as high as 719, generally considered to be A credit.

Up until recently, borrowers who got Approval recommendations from either of the two Government Sponsored Entities (GSE's) would enjoy access to the same interest rates regardless of credit.  In other words, it didn't matter if your credit score was a 610 or a 780; as long as the automated underwriting engine returned an Approve/Accept recommendation, your rate was the same.  However, in response to turmoil in the secondary market, the GSE's are attempting to properly reflect the additional risk present with lower credit scores and higher loan-to-values. 

The net result of these changes is that it will become more costly for borrowers with credit scores below 720 and LTV's above 60% to get a mortgage; it will become far morecostly for those with lower credit scores and higher LTV's.  For example, those trying to borrow 90% of the value of their home with credit scores in the 620's will now pay a loan level price adjustment of 2.75%.  In other words, it will cost you almost 3 points to get the same rate that a borrower with excellent will qualify for.

As you can see, your credit score is more important than ever before when it comes to obtaining a mortgage.  And you can expect these additional risk adjustments to make their way into other credit markets, like car loans, credit cards, and even insurance.  So what do you do if your score isn't where you want it to be?  Well, the first thing to do is to understand how your credit scores are created.  It's not simply just paying your bills on time, although that's certainly a big part of it.  Managing your ratio of utilized credit to available credit, limiting credit inquiries, and the length of your credit history are all important factors as well.

If you know your score needs improvement, or you know somebody who needs some credit advice, give me a call at (978) 853-7066, or Click Here to send me an email, and I'll be happy to send you a free report entitled "Everything you Need to Know About Credit Scores".