Saturday, 28 April 2012 22:51

Credit and Downpayments

Written by  Gina Roberts-Gray
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What Role Does Your Credit Score Play in Down Payments?

The mortgage market is loosening up just a bit, and you’re hoping to become a new homeowner. But experts say before perusing the listings, you need to understand the role your credit score can play in the amount of money you'll need to pony up to qualify for a mortgage or get through closing. Or that adding one or two more points to your credit score can save you hundreds -- or more -- at closing.

“1 point can make the difference between being approved with only putting 10 percent down payment versus needing to put 15 or 20 percent as a down payment,” says Eugene Hedlund, mortgage broker in Irvine, California.

How low can you go

Doug deBruyn, certified mortgage planning specialist in Bellevue, WA says the lowest your score can dip to qualify for any mortgage is 620. “That score will let you go with an FHA, government backed, loan which requires no less than 3.5 percent down.”  But he cautions “conventional loans” aren’t as liberal as their FHA counterparts. You typically need at least 10 percent down; more if your credit is shaky. “One of my lenders will underwrite a 680 score with less than 20 percent down while another might consider a score of 660,” he says. “But those might carry a much higher interest rate than if a person’s score was in the 700s.”

That’s because when lenders underwrite loans, they do so with the intention that the loan will be attractive to Fannie Mae and Freddie Mac. “Fannie and Freddie purchase loans, and are far less willing to purchase risky loans than they once were,” says deBruyn. These players prefer transactions that already have some equity in them. “Fannie and Freddie don’t like a loan to value (LTV) ratio greater than 80%,” deBruyn explains. “If your credit isn’t up to snuff, lenders might want an even lower LTV to entice Fannie and Freddie.” So you may have to come up with a bigger down payment.

Closing in on costs

Your credit also dictates the interest rate at which a lender is willing to give you a mortgage. Hedlund says to get a rate that you can afford, “you might have to cough up additional money at closing for “points”, the penalty that’s equal to a percent of the loan, a borrower pays to the lender to secure an interest rate.” 
The lower the credit score, Hedlund says the more money you’ll either need to put down, or pay in points. “Any score below 740 will have a direct impact on how much money you’ll need at closing.”  For example: To qualify for an interest rate of 5.25%, here’s how your credit score can affect how much it’ll cost you to get into a new home:

Down payment of 40%
Credit Score            Points
620 -  660            .5%
660 - 699             no points
700 and above .25% credit to the buyer.


Down payment of 30%
Credit Score            Points
620 - 639            1.5 points
640 - 659             1.25 points
660 - 679             1 point
680 - 719            .5 points
720+             no points


Down payment of 25%
Credit Score            Points
620 - 639             2.75 points
640 - 659             2.5 points
660 - 679             2 points
680 - 699             1 point
700 - 719            .5 points
720+             no points


Down payment of 10% - 20%
Credit Score            Points
620 - 659            2.75 points
660 - 679             2.5 points
680 - 699             1.5 points
700 - 719             .75 points
720 - 739             .25 points
740+             no points


One more way your credit score matters is when you’re trying to secure PMi (private mortgage insurance), something that’s required when financing more than 80% of a home’s value. deBruyn says to qualify for PMI in this market, you need a score of 700 in all states (except in Florida, where you need a 720) for any loan with less than 20% down with a minimum down payment of 5%. “If putting down more than 20%, minimum credit score is 620,” he adds.

Hedlund notes whether you’re “just looking” or seriously shopping, it’s best to know what your credit score is (from all three credit bureaus). “Talk to a mortgage specialist to understand your options and what percentage of a down payment you’re likely to need before finding a house to avoid hitting any snags once you’ve fallen in love with a property.”

Last modified on Saturday, 28 April 2012 23:12
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