According to a recent report from consumer credit reporting firm Experian, the average U.S. FICO score is 711. FICO is an acronym for Fair Isaac Corporation, the people who created the FICO score. The highlight of the report, however, was that a difference of just a few points can make a huge difference when it comes to getting credit.
Local mortgage loan lenders typically sell these loans to investors in the secondary mortgage market. These investors fall into three categories; Government-sponsored corporations, the US government, and private investors. Freddie Mac and Fannie Mae are both GSEs and together own around 46 percent of all mortgages. Ginnie Mae, 100% owned by the US government and buying VA loans, is responsible for another 15 percent. Private investors such as pension funds, insurance companies, large banking institutions and securities dealers buy the remaining 39 percent.
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It is the investors who set the minimum standards that buyers must meet in order for their loan to be purchased. Local lenders usually have relationships with a range of investors so that they can lend to the widest range of buyers. It is precisely for this reason that buyers should look around before choosing a lender. A typical example would be a buyer with a credit score of 630 who is told by Lender A that they will not qualify because the lender’s investor requires a minimum credit score of 640. The same buyer can easily qualify for the same loan from Lender B, whose investor only needs a minimum score of 620.
The score itself is an indicator of the risk. Some investors are risk averse and prefer buying loans to borrowers with high credit scores. High scores usually indicate good money management and low risk for the lender, mortgage insurance company, and investor. The investor rewards his most creditworthy borrowers with low interest rates. The opposite is true for low-score borrowers.
How do credit scores affect the cost of money? In a word, great. According to the myFico loan cost calculator, these are available to consumers at http://www.myfico.com/credit-education/calculators/loan-savings-calculator/The monthly principal and interest payment on a 30-year fixed rate mortgage of $ 221,730 that was borrowed in New Mexico on March 23 ranged from a low of $ 906 to a high of $ 1,103. I decided to put $ 221,730 in the calculator as that was the median retail price for the 488 new and existing homes, townhouses, and condos sold in our area through March 23 of this year (according to Las Cruces Assn of Realtors from March 23). .
The interest rate and monthly payment are not the only parts of a mortgage that are affected by credit scores. The difference in the amount of interest paid over the life of the loan also varies significantly. In our example, the total interest on a $ 221,730 loan given to a borrower with a value between 760 and 850 would be $ 104,393 at 2.756 percent. Borrowers whose score is between 620 and 639 would pay $ 175,402 at 4.345 percent. According to my fuzzy calculation, that 121 point difference over the 30 year term of the loan is worth $ 71,009.
Whether you’re buying a home or a vehicle, getting almost any type of insurance, or applying for a loan, it’s worth knowing what’s on your loan records. A small mistake in a report can easily lead to higher costs. Checking files is free and easy. Everyone in the US is entitled to a free annual loan review at any of the three credit bureaus: Experian, Equifax, and Transunion. You can get free access by logging in to www.annualcreditreport.com. The website is the only US government authorized portal that gives free access to all three reports. Errors can be disputed online or by calling 877-322-8228. Inquiries can also be made in writing to the Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.
In the end, you are the only person on the planet who is responsible for your credit scores. If you haven’t checked your files lately, now may be a good time to do it.
I’ll see you close.
Gary Sandler is a full time real estate agent and owner of Gary Sandler Inc., Real Estate Agent in Las Cruces. He is happy to answer questions and can be reached at 575-642-2292 or [email protected].
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