In my last article I discussed a bit about credit scores and the five factors that make up our score (to read my last article click here).
In this article, I’m going to provide a short list of how much a low credit score can cost when it comes to a mortgage.
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How Does a Low Credit Score Affect My Interest Rate?
1. You May Not be able to Own a Home Again for Many Years.
Whether or not you’ve always had poor credit, or have just suffered from the recent mortgage crisis, this is a very real possibility for many people. If you have low scores or problematic reports, lenders will either deny you flat out or penalize you with such exorbitant rates that the outcome ranges from completely undesirable to impossible.
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2. You Will Pay Higher Interest Rates
It just makes sense that if you have higher credit scores, you will pay a lower interest rate on your mortgage loan and will have to put less down. Fair Isaac’s consumer website at http://www.myfico.com offers a mortgage payment calculator that is updated regularly to show consumers how their FICO score can affect their interest rate.
Per myfico.com, for a 30-Year Fixed Rate Mortgage with a loan principal amount of $300,000, if you improve your credit score from 620 to 720, you could save $110,000 over the life of the loan in interest.
Of course, interest rates are determined by many factors, but the bottom line is that individuals with low credit scores will pay nearly three times more in interest than those with strong credit scores.
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3. Now You Will Be Subject To Loan Level Price Adjustment Fees (LLPA’s) when applying for a conventional mortgage.
Consumers with a middle score of less than 740 will now be subject to a credit score based fee known as Loan Level Price Adjustments. These fees were implemented by Fannie Mae and Freddie Mac in 2010 in an effort to recover money lost due to loan defaults. What this means to consumers is that if your scores are below 659, you could be paying a 3.250% fee on the total loan amount in addition to normal closing costs.
| FICO Score | LLPA You Will Pay |
| < 659 | 3.250% |
| 660-679 | 2.750% |
| 680-699 | 1.750% |
| 700-719 | 1.000% |
| 720-739 | 0.500% |
| 740 > | 0.250% |
For people experiencing the worst-case scenario, carrying a middle credit score of less than 659 could cost you an extra $9,750 upfront on a $300,000 loan amount.
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4. You Will Pay More For Private Mortgage Insurance (PMI)
PMI is insurance that mortgage lenders require from most homebuyers who have less than a 20% down payment on their property. If your credit scores are marginal, your private mortgage insurance rate might be hundreds of dollars higher per month than you expect, and you usually don’t find this out until closing.
–Written on October 29, 2013.