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A borrower’s credit scores can affect both his qualification and pricing.  Borrowers with median credits scores of 760 or higher obtain the most favorable rates, pricing and mortgage insurance premiums.

 

The additional amount a borrower pays for credit scores below 740 is called a “loan level pricing adjustment” (a LLPA).  The chart below is from a Fannie Mae publication showing the LLPAs for various loans. They are the same for all borrowers regardless of the lender.

 

 

For the purpose of our presentation we will assume the following facts.  A purchase transaction with a purchase price of $375,000 with 5% down.

 

 

For a transaction with a 95% loan to value (LTV) ratio (5% down on a purchase) the adjustment to the “price” (points) at any particular rate is .500% (1/2 point) for a borrower with a median credit score in a range from 720 to 739. But the adjustment is 1.250% (1.25 points) if the borrower’s median score is in a range from 680 to 699.

 

For a transaction with a 95% loan to value (LTV) ratio (5% down on a purchase) the adjustment to the “price” (points) at any particular rate is .500% (1/2 point) for a borrower with a median credit score in a range from 720 to 739. But the adjustment is 1.250% (1.25 points) if the borrower’s median score is in a range from 680 to 699.

 

A borrower with a 699 median score would have an LLPA that is .750% higher than a borrower with 721 score and would therefore pay $2,671.87 more at closing to get the same interest rate.

 

The credit report indicated that the primary reason for the lower TransUnion score was a “Derogatory public record or collection filed”

 

 

We observed that a collection agency was reporting an unpaid account with a $137 balance. The applicant had previously disputed the account. However, the only effect of that dispute was to indicate a status of “disputed” in the report.  Fannie Mae and Freddie Mac guidelines will not permit a borrower to obtain a loan with a “disputed” status indicated on any account. To obtain loan approval the status of “disputed” would have to be removed.

 

 

We provided the applicant with instructions that might enable him to obtain full deletion of the item. A “deleted” collection item would more positively affect credit scores than one that is merely shown “paid”. Following our instructions, the applicant was able to negotiate the complete “deletion” of the derogatory item from his credit file.

 

Approximately 2 months later we pulled an updated credit report and there was no collection item shown on the report.  As you can see, the “factors” section of the report no longer indicates the collection item as a “factor”.

 

 

In the updated credit report that we obtained in May of 2013, the TransUnion score, once the lowest score at 699, was now the highest score at 732. The applicant’s median score was now the Experian score at 726. The median score on the report was now 27 points higher than on the original report.

 

By improving the median score from 699 to 726 the borrower’s loan level pricing adjustment improved by .750%. On a loan amount of $356,250, the borrower was now paying $2,681.77 less than he would have paid at closing with the median score of 699.

 

Because the borrower was putting 5% down he was required to obtain and maintain private mortgage insurance.  The premium paid on private mortgage insurance is also affected by a borrower’s credit scores.

In this transaction the borrower was required by agency guidelines to obtain mortgage insurance with 30% coverage. For a borrower with a median score in a range from 680 to 719 the rate for mortgage insurance was .89%.  But for a borrower with a score in a range from 720 to 759 the rate was only .62%.

 

 

Thus by improving his median score from 699 to 726 the borrower was able to obtain private mortgage insurance at a rate of .62% versus .89%. On a loan amount of $356,250 that would reduce the monthly PMI payment from $264.22 to $184.06, an improvement of $80.16 per month.

 

A borrower putting 5% down will pay this monthly PMI payment for 106 months (slightly more than 8 ½ years) before the requirement to maintain the PMI is eliminated by law.

Let’s do the math.  By improving his median score from 699 to 726 the borrower saved $80.15 per month for 106 months. That’s cumulative savings on mortgage insurance alone of $8,496.96.

 

With our guidance the applicant was able to improve his median score by 27 points in about 60 days. We saved the applicant $2,681.77 in reduced closing costs as a result of the lower “loan level pricing adjustment” resulting from the higher credit scores.

We also saved the applicant $8,496.96 in cumulative PMI payments by assisting him in improving his credit scores. That’s total savings in excess of $11,178.73 by reason of the 27-point improvement in the median credit score!

 

This example of a real-life borrower shows the importance of contacting an experienced and knowledgeable loan consultant early in the home buying process. Had this borrower waited an extra month to make application with our company it would have likely been too late to achieve the results we obtained in about 60 days. The borrower would have paid about $12,000 more than necessary in financing costs.