Why is a Credit
Score So Important?
Part 18:
As part of series of articles (blogs)
regarding Credit and Credit Score, here we
go:
Disclaimer:
Every effort has been made to make these
articles as complete and as accurate as
possible, but no warranty or fitness is implied.
The information provided is on an “as is” basis.
The author shall have neither liability nor
responsibility to any person or entity with
respect to any loss or damages arising from the
information contained in this book.
The author is not engaged in professional
services. If professional advice or other expert
assistance is required, the services of a
competent professional person should be sought.
Why is a Credit
Score Important?
In today’s tough economic times, where every
person is being evaluated and judged by a number
(credit score), having a good credit score is
essential to enjoy an appropriate standard of
living. You need to have good credit just to
rent an apartment, rent a car, open a bank
account, get insurance, get a job, buy a car or
obtain a home mortgage. Depending on your
credit, you will be denied a loan, offered a
normal rate, or offered a higher than normal
interest rate, or required to put more money
down, etc. Just a few points on your score can
be the difference between getting a home or auto
loan, or even a credit card. Similar to most
cases in finance, those considered “low risks”
get to pay the lowest rates.
To mortgage lenders, your credit score
represents your likelihood of making on-time
mortgage payment for the next couple of years.
Therefore, it is very important to have a
good/excellent credit history and credit score.
You also need to know what is in your credit
reports and what your credit score is.
Credit scores play a major role in determining
which mortgage product or loan you will qualify
for and what rate your lender will offer.
Table
1: LLPA adjustment based
on the LTV and credit score
Source:
https://www.fanniemae.com/content/pricing/llpa-matrix.pdf
Published 9/20/2012
Note: For loans with LTV > 80%, an additional
fee known as PMI (Premium Mortgage Insurance)
will be added to the Mortgage payment.
Figure
1:
Affect of FICO Score on Loan-Level Pricing
Adjustment (% of the Loan Amount)
Assuming 20% down (LTV
=80%)
Figure
2:
Affect
of FICO Score on Loan-Level Pricing Adjustment
(Added Fee)
Assuming Purchase Price of $300,000 and 20% down
(LTV =80%)
For a given LTV (Loan-To-Value):
·
The higher your credit score, the lower your
Loan-Level Pricing Adjustments (LLPA) rate will
be.
·
The higher your credit score, the lower your
LLPA Added Fee + Mortgage Insurance will be.
·
The higher your credit score, the lower your
mortgage or interest rate will be.
Example 1:
A home purchased at $300,000 with 20% down
carries a Mortgage loan of $240,000. LLPA added
loan fees which are due at closing for borrows
with a credit score of 741 and 655 are $600 and
$7,200, respectively. As you see, the borrower
with the lower credit score of 655 will pay an
extra amount of $6,600 compared to the
borrower with credit score of 741. This shows
an example of a negative impact or cost of a low
credit score on a mortgage loan.
Example 2:
the monthly payment (Principal + Interest) of a
$250,000 loan with 30-year fixed rate of 3.5%
and 4.5% would be $1,266.71 and $1,122.61,
respectively. A 1% increase in the interest rate
in our example will cost the borrower an
additional $51,876 in his/her 30-year loan term.
Conclusion:
Credit scores play a major role in determining
which mortgage product or loan you will qualify
for and what rate your lender will offer.
The higher your credit score, the lower your
mortgage or interest rate will be.
If you plan to obtain a mortgage for your next
home purchase or buy a car, you will want to
keep your credit scores as high as possible.
You also need to know, preferably at any time,
what is in your credit reports and what your
credit score is.
By the Way, the time is 11:00 AM, do you know
what your credit score is?
HOW to overcome the problems with your credit
history and credit score?
Knowledge, education, awareness, practice and
discipline are the essential keys to being
successful on any subject. The book,
"Credit Score Tips and Tricks",
provides you information, tools, techniques to
educate yourself and manage your credit report &
credit score, and therefore manage your finances
effectively at no additional cost.
I have decided to bring and share with you,
chapters or sections of my book,
Credit Score Tips and Tricks,
as series of
articles here. This is the number
18 of such a
series.
I also created and manage a GROUP in ActiveRain,
Credit Reports and Credit Scores, Please
feel free to join and share your thoughts and
experiences.
