Ever since it became public knowledge that Fannie Mae was in financial trouble, the agency has implimented "Loan Level Price Adjustments", which are basically add-ons to the rates, based on credit score, LTV ratio, CLTV ratio, loan purpose and also property type.
On December 29, 2008, Fannie Mae announced they will be raising these adjustments yet again, starting on all loans purchased by the agency after April 1, 2009. Basically that means that each individual lender will have to decide when to implement these changes so they can make sure they have enough time to complete the sale to Fannie Mae. In other words, expect most lenders to start requiring these new adjustments on loans originated and locked after the beginning of February. I'm already getting notices from my lenders, and the earliest date that I've seen so far has been February 2, 2009.
So what will this mean to buyers and those that want to refinance their existing mortgage? Basically, if you have less than a 700 credit score, you will have to either pay a higher interest rate, or pay more points to get the same rate as someone with a higher credit score.
ONE NOTABLE EXCEPTION: THESE ADJUSTMENTS DO NOT APPLY TO 15 YEAR LOAN TERMS OR TO GOVERNMENT LOANS, SUCH AS FHA AND USDA!
The adjustments are quoted based on the YIELD, not the RATE, and the yield on different rates adjusts quite frequently. So in terms of the net effect to consumers, I'm going to express this in terms of net cost to consumers based on points for a $100,000 loan amount.
So in other words, a borrower with a credit score of 645 and an LTV of 95% will pay an additional $4,500 in points on a $200,000 loan amount IF they want to get the same rate as someone with a 720+ credit score. If they DON'T want to pay these points, then they will have to settle for a rate that's approximately .5% to .75% higher, depending on how much yield it takes to absorb the price adjustment on any given day. You will have to contact a mortgage professional to get an exact rate quote on the rate adjustments since yields change every day and there's no preset formula for determining the increase in rate. It all depends on the specific yield on any given day with each lender.
So the bottom line is that it's going to become MUCH MORE EXPENSIVE to obtain a Conventional Loan with less than perfect credit.
And FYI, most lenders that advertise those low rates don't tell you about these adjustments in their advertising. The little star (*) that says "Additional fees and restrictions may apply" is referring to these. This EXPLAINS WHY IT IS PHYSICALLY IMPOSSIBLE TO QUOTE INTEREST RATES WITHOUT KNOWING THE CREDIT SCORE AND LOAN TO VALUE RATIO!!! I CAN'T STRESS THIS PART ENOUGH! IF YOU'RE GETTING RATE QUOTES FROM LENDERS AND THEY AREN'T ASKING THESE QUESTIONS OR LOOKING AT A TRIPLE MERGED CREDIT REPORT, YOU CAN TOSS THAT RATE QUOTE OUT THE WINDOW!
And IN ADDITION to these adjustments, there are CUMULITIVE ADJUSTMENTS that apply to the following transactions:
- Cash Out Refinance Transactions
- Two Unit Properties
- Subordinate financing (two liens)
- Interest Only Mortgages
- Condominiums and Coooperative Properties
The adjustments for cash out refinances and subordinate financing are based on credit score and LTV, whereas the adjustments for two unit properties, condos and interest only mortgages are based solely on LTV.
So what about government loans, such as FHA and VA? They don't have any specific loan level price adjustments, BUT VIRTUALLY EVERY LENDER IS IMPOSING ADDITIONAL RATE ADJUSTMENTS FOR CREDIT SCORES BELOW 620. And those adjustments are significant for loans with credit scores under 580.
The bottom line is that it's getting more expensive to obtain a loan if you have less than a stellar credit score. For the purposes of Conventional loans, "stellar" means 700 and above.
The bar has been raised yet again. And this trend may continue until the losses on lending have reached a bottom. It's anyone's guess as to when this will happen. For now, consumers need to start optimizing their credit score well in advance of applying for a loan. Failure to do so can cost thousands of dollars in additional points or potentially tens of thousands of dollars in additional interest charges over the life of the loan.