How Much is Your Credit Score Costing You?
Your credit score has a direct impact on the cost of your home loan.
Knowing how this works can save you thousands of dollars in closing costs, and much more over the life of the loan by avoiding a higher interest rate.
I’ve seen it time and time again, home buyers and home owners losing hundreds, and thousands of dollars because of inaccurate credit reporting.
With a little education, ethical guidance, and patience, most borrowers have an opportunity to either borrow more, or get a lower rate on the loan that you’re applying for.
My experience over the years has been that most homebuyers with credit scores below their potential do not have bad credit, they simply do not understand how to build good credit.
If you’r currently experience a hardship, and have recent late payments on your car, credit cards, or other loans, it will require proactive action, education, and time to cure.
If your credit is good, but not as high as you would like? There is probably a really good chance that your scores can be easily increased, in a relatively short period of time.
Ask a Credit Expert
Sam Parker from MyCreditGuy.com is someone that I personally know and completely trust. Sam specializes in helping mortgage borrowers get quick credit restoration results to either buy a new home, or refinance your current mortgage.
Sam and I discuss in detail some of the best practices for getting a quick boost in your credit score to qualify for a better mortgage rate.
How Credit Scores Affect Interest Rates
Just as you can pay discount points to reduce your interest rate, you can also add closing costs due to your credit score. This will result in a higher final rate for lower scores, and a lower rate with higher scores.
The type of loan program you are trying to qualify for will also determine how much you will benefit, or be penalized for your score.
Once you reach a minimum qualifying credit score, which is typically between 620 and 640, there the costs, or credits that will be applied to your interest rate. These costs are called “Loan Level Price Adjustments”.
For instance, a “Par” interest rate is one that does not require discount points, and will not produce a rebate. A loan level price adjustment of 0.50 means that that you will need increase the interest rate to cover this cost.
Here is an example of how the cost of your interest works. Keep in mind that this is for example purposes only, and there is no guarantee that these interest rates will be available when you read this article.
How to read this chart
To the left, you will see the interest rate. As you move to the right, you will see the cost, or rebate that will be credited back to you.
1.00 = 1% of the loan amount.
You will notice that as the interest rate increases, the numbers show up in parenthesis. Numbers in parenthesis represent a rebate.
This rebate can be used to help cover your closing costs associated with the loan
Now let’s take a look at how Loan Level Price Adjustments vary based on your credit score.
FHA and VA Government Insured Loans
Here is an example of Credit Score price adjustments:
|VA Loan with Credit Score 620-639||1.00|
|Credit Score 640-659||0.500|
|Credit Score 660-679||0.500|
|Credit Score 720+||(.0250)|
|VA High Balance w/ Credit Score <720||0.020|
Conventional Loan Level Price Adjustments
As you can see, conventional financing can be significantly more expensive than Government loans if you have lower credit scores, and a higher loan to value.
A perfect example of how a little bit of credit clean up can save you a ton of money is highlighted in this graphic. If you apply for a loan with a 679 FICO, at 80% Loan to Value, you are going to get hit with a full 2.75% of the loan amount as a loan level price adjustment. This translates into approximately a .5% increase in your interest rate.
If you increase your credit score by 1 single point to 680, you save thousands of dollars in closing costs, which will translate into anywhere from .125% to .25% improvement in your interest rate.
As you can see, you don’t need bad credit to be penalized, even borrowers with good credit can benefit from a little credit cleanup.
Top 3 Ways to Build Good Credit
One of the most common reasons I’ve encountered for why folks have bad credit, is because they do not see a clear and simple path to building good credit.
80% of your credit score is calculated based on 3 factors. It is my experience that being aware of these factors, and following some simple best practices, you can overcome any credit challenge.
I actually learned this next lesson the hard way, through personal experience. I have since shared this story, and experience with many, many people.
I had credit challenges in a past life, and for the first time in my life, was not able to make payments on an automobile, and a credit card. It was such a traumatic experience for me, that I stopped using my credit altogether.
I thought, if I stop using credit, then I can’t get bad credit…..I couldn’t have been more wrong.
7 years after that decision, my credit scores were almost 100 points lower than when I had bad credit. Bummer.
1. On Time Payments – 35%
I then got to work building good credit. I started with a secure credit card, and Within 12 months, my credit was 120 points higher, and good enough to buy
On time payments is the absolute largest factor in calculating your credit score. It stands to reason then, that not having on time payments is about the worst thing you can do to your credit score.
If you find yourself in a pinch – Life happens, we’ve all been through it. When you find yourself in a tight financial situation, there are several things you can do to protect your credit score:
Your payment is not reported late until 30 days it’s due date. Even if your credit card company says you are late, and even charges you a late fee, it is not reported to the credit bureaus until it is 30 days delinquent. This can give you some much need time and preserve your score.
Know what reports to the credit bureaus, and what does not. Not every utility or service reports to the credit bureaus. Household expenses such as cable bills, and even utilities, can go late without affecting your credit score.
If you find yourself in between a financial rock and a hard place, and a delinquent payment is inevitable, you’re better off going without Starbucks or Cable TV than taking a 3o day late on your credit report.
2. Credit Card Balance – 30%
Also called “utilization of debt”, this calculation looks at the proportion of your credit card balance, as a percentage of your high credit limit.
As a general rule, your credit score will suffer significantly if your credit card balance is greater than 40% of your high credit limit. Keeping credit card balances low is key to improving, and preserving good credit scores.
3. Length of Credit – 15%
A healthy credit score is one that has zero accidents in as many days as humanly possible. The longer you have open credit lines in good standing, the stronger your credit profile becomes.
Long term stability builds a solid foundation that will lift your scores higher and higher as your pattern of good credit history pays off.
Need a Quick Credit Boost?
There are several ways you can get a quick boost to your credit score. And when I say “quick”, I mean a month or two instead of 6 months to a year.
If you are in the process of applying for a home loan, or thinking about applying in the future, most lenders will not take the time to help you improve your scores, and get the lowest rate and closing costs.
While you can do some of these things yourself, there are also reputable companies that can handle more complicated situations.
I work very closely with one of those companies and am happy to introduce you if that is your only option for increasing your scores.
Working with a Mortgage Expert
Choosing the best mortgage based on your qualifications requires that you work with a professional loan officer that has experience with all of the options that are available to you.
All mortgage companies are NOT created equal. Big box lenders that advertise on TV, radio and the internet, often only target a very narrow qualifying criteria.
These popular lenders spend millions of dollars on marketing and advertising, only to dump you into a call center and put you in the hands of an inexperienced customer service telemarketer.
Big box lenders try to convince unsuspecting consumers that it’s the lender that matters, and never mention the fact that your loan officer is the gateway to you getting the best mortgage.
You should avoid these types of lenders at all costs if possible. They do not offer lower rates or better service, but they do have more money to convince you that they do.
Set Yourself Up for Success
Not sure where to find a professional loan officer that you can trust? You’re in the right place!
If you have any questions or comments about this topic, feel free to leave a comment below, or you can shoot me an email at firstname.lastname@example.org.
Now sure how to identify a professional loan officer? Watch these expert interviews I’ve done with professional loan officer friends of mine.
I firmly believe that once you hear how a professional loan officer communicates, it will help you to avoid silly mistakes and errors that are common with inexperienced or uneducated loan officers.