Due to the mortgage market mess we have been experiencing, Fannie Mae and Freddie Mac are drastically changing the way they do business. Many people think these changes will help protect the corporations and the future of the mortgage market.Until now, a credit score of 620 was the theoretical limit for obtaining a conventional loan. If your scores were above 620 you would get a rate the same whether your score was 620 or 800, as long as you had at least a 5% down payment. I say the 620 is theoretical because a lot more is considered when applying for a mortgage (e.g. credit history, down payment, cash reserves in the bank, debt-to-income ratios, etc.). Many people with credit scores below 620 have been approved for conventional loans and some with credit scores above 620 were denied.
Starting with loans delivered March 1, 2008, Fannie Mae and Freddie Mac are adding fees for any loans with a loan-to-value (LTV) greater than 70% and a credit score less than 680.
Following are the Loan-Level Price Adjustments (LLPAs) for loans with LTVs of 70.01% and greater:
These LLPAs are for single-family, owner-occupied properties and are adjustments to the points required on a loan, and not to the interest rate. There are other adjustments for 2-unit properties as well as mortgages with subordinate financing (2nd mortgages) such as 80/10/10s.
Borrowers will have to decide to pay for the LLPAs as points or accept a higher interest rate in place of the additional points. For example, for a borrower with a credit score below 620 and LTV greater than 70% they can expect to pay about 1.00% higher in their interest rate.
If you are planning to purchase or refinance a home in the future, make sure you contact your loan officer well in advance so you can check your credit scores and make any improvements necessary to increase your credit score. Please view my blog posting Understanding Credit Scoring and Credit Repair from August 2006 to see how you can improve your credit score.
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