Frequently Asked Questions
"Why Is My Credit Score More Important Than Ever?"
As I am sure you are aware, for decades now we have had a scoring system whereby the computers of the three major credit bureaus (Experian, Equifax and Transunion) assign your credit profile a score or a grade. You probably have a good idea of what your score is, but most of you and even most mortgage professionals do not really know what makes up the score. The pie chart below shows what factors make up the recipe for your credit scores. Most everyone assumes that payment history is the only truly important factor. However, we have seen first-hand over the last several years that the ratio of balance vs. the amount of credit available credit cards is almost as important as payment history. As mortgage professionals we have seen many examples of clients with long credit histories free of credit blemishes, but whose credit scores have dropped from the high 700’s to the high 600’s/low 700’s. Why? Because they happen to have made a large purchase in a given month, pushing the balance owed closer to the max high credit limit.
Before the mortgage meltdown of 2008, a 680 credit score was considered strong and had little to no impact on the Fannie Mae or Freddie Mac loans. Now the two agencies have adopted “Risk Based Pricing” which factors in both your credit scores and your mortgage loan-to-value ratio (LTV). As the credit score goes down, the adjustment to interest rate pricing goes up. If the LTV of your mortgage also goes up, then there are further increases to the interest based pricing. (A copy of the Risk Based Pricing Chart is posted on our website).
In April of this year Fannie/Freddie will further tighten up the Risk Based Pricing and the adjustments, making them more punitive than ever before.
Borrower A has a middle credit score of 789, a first mortgage of $400,000.00 at 75% LTV and an Equity line of $65,000.00 with a total LTV of 88%. Because of the high score, there is only adjustment to pricing is .250% of the loan amount ($1,000.00), this due to the total LTV being over 80% but no hit for credit score.
Borrower B has a middle credit score of 689, a first mortgage of $400,000.00 at 75% LTV and an Equity line of $65,000.00 with a total LTV of 88%. Because of the low score there are much higher adjustments to pricing in this case 2.00% of the loan amount ($8,000.00). There are two adjustments one for the low credit score and the other due to the total LTV ratio being over 80% with a low score.
Bottom line: Know what makes up your credit scores and manage your credit usage accordingly or you will end up throwing money away. We advise our clients to keep credit card balances below 50% of the line amount whenever possible. If you must charge a high item, do what you can to hold off purchasing until after your refinance/purchase transaction is complete. Have a plan devised to pay the debt down or off in the shortest amount of time as possible.
New for 2011: Fannie Mae’s Loan Quality Initiative requires that the lender re-pull your credit within 10 days of funding a loan. Any changes in credit balances or credit scores will have to go back to an underwriter for review. This can delay the process and possibly result in credit denial if the new debt causes you to no longer meet the income to debt requirements, or could result in a change in the cost of your loan through changes in the Risk Based Pricing.
Impact of Balance vs. Credit limits.
0-30% HCL – Little no impact on scores
31-50%HCL- minimal impact
51-75%HCL- moderate impact
75-100%+HCL- Substantial impact
To learn more about what you can do to maintain strong credit scores, we recommend that you visit http://www.scoreinfo.org