How High of a Fico Score Do I Need to Get the Best Mortgage Rate?

Not All Fico Scores Are the Same …

Mortgage Lending Scores are Different.

Credit scoring is quite complicated and deceptive in the mortgage market and a low score, as opposed to excellent score, can affect one’s interest rate as much as 1.5%. Here are some things you need to know.

In mortgage lending, explaining credit to reverse a mortgage turn down is not an option in today’s lending world. Why? Because the interpretive process is now automated and controlled by credit scores. Prior to credit scoring, one could wirte a letter of explanation and reverse a turn down, but not in the modern age. Yet there are ways to change your score quickly, covered later.

Also, the online models such as Experien, Credit Karma (including your free bank scores associated with credit cards) and My Fico are consumer scores and do not refelct mortgage scores accurately, Consumer scores can be off as much as 25 to 75 points compared to a mortgage score.

For instance, mortgage lenders tend to use different scoring models than those used for general lending decisions, such as credit cards.

While most lenders use the FICO Score 8, mortgage lenders use the following scores:

  • Experian: FICO Score 2, or Fair Isaac Risk Model v2.
  • Equifax: FICO Score 5, or Equifax Beacon 5.
  • TransUnion: FICO Score 4, or TransUnion FICO Risk Score 04.

Unfortuantely, these modesl are not readily available online and you will have to hire a mortgage lender to get the right scores. DO NOT RELY ON ON-LINE FREE REPORTS. They are inaccurate for mortgage lending.

So What Kind of Scores Do I Need to Get the Best Mortgage Rate?

The answer is that it depends on what kind of mortgage you are applying for and

how much you are putting. For example, for a standard 3% down conventional loan.

The best rate you can get is based on a 780 score. Either your rate or fees will be

progressively worse in increments of 20 points less. For example, 760-789 score will

cost you either .375% more in fees or .105% in higher rate. On a $400,000

mortgage, the fees could be $1500 more or an .125% higher in rate. You can subsidize

the fees by paying a higher rate. A 740 to 759 rate will cost you .5% in fees more or

guranatee a full .125% to the rate. A 720-739 score will add .75% to your fees or .375%

to your rate. Each increment of 20 points will raise rates or fees. A 620-639 score will

raise your rate .875% on a conventional or cost $7,000 more in loan fees! Additionally,

Lower Fico Scores Also Incur Higher Mortgage Insurance Charges on Conventional Loans.

Lower fico scores are the enemy of conventional rates. For example, if your fico score

is 780 or better, your mortgage insurance premium is .30%. ON a $400,000 mortgage

that is $100 a month and much better than the FHA’s mortgage insurance rate for the

same fico score. IT IS NEVER WORTH BUYING OUT THE MORTGAGE INSURANCE OR

HAVE THE LENDER PAY FOR IT BECAUSE THE INTEREST RATE GOES MUCH HIGHER.

If you have a 680 score wioth 3% down, your rate and mortgage insurance drastically

changes on a conventional loan. Your interest rate will be over .50% higher or you will

pay $4500 in fess to keep the same rate. Mortgage insurance is .89% a month or

$296.66 a month. With a 620 score it gets much worse: The rate is almost 1% higher

than with a 780 score and mortgage insurance is 1.56% a month ($520 a month)

When Lower Fico Scores Make Sense to Take an FHA Loan

With a FHA loan the best rate for the best score is only 680. (A few lenders will lower fees by .125% for a 700 score. On a $400,000 loans that is $500 in savings. on a 620 score the rate is only .125% worse. The monthly mortgage insurance premium does not change based upon lower scores. It is .55% per month or $183.33 no matter what the score is, but there is also a draw back. There is a 1.75% up front and financed additional mortgage insurance fee, paid one time for all FHA loans. That is a whopping $7,000 extra, but the good news it is financed. Keep in mind, a down payment for FHA is 3.5% rather than 3% ALL EXAMPLES BELOW WILL BE AT 3.5% FOR BOTH LOAN COMPARISONS. So when does it make financial sense to go FHA over conventinal? The answer is at 680 or lower one whould should take an FHA or a convnetional loan. See Below example for 680 scores:

CONV. LOAN: 8.125% $400,000 PAYMENT: $2970 Mortgage Insurance $297

FHA Loan: 7.500% $400,000 PAYMENT: $2845 Mortgage Insurance $183

The difference between the totals ($3267 – $3028 = $239 a month). The $239 a month pays for the upfront mortgage insurance premium in 29 months and also helps one qualify for a higher priced home. Although in this higher interest rate market, some people may want to go for the higher rate on a conventional loan and refinance in less than 2 years once rates fall back to normal assuming they will.

See Below example for 620 scores:

CONV. LOAN: 8.440% $400,000 PAYMENT: $3058 Mortgage Insurance $520

FHA Loan: 8.125% $400,000 PAYMENT: $3021 Mortgage Insurance $183

The difference between the totals ($3578 – $3204 = $374 a month). The $239 a month pays for the upfront mortgage insurance premium in 19 months and also helps one qualify for a higher priced home.

If it were me, I would chose a FHA loan over a conventional loan if my scores were 679 or worse and maybe even at 680, especially if I wanted to qualify for more property.

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