“When it comes to mortgages, auto lending and credit cards, the higher your score, the lower the interest rate you’re going to pay,” says Barry Paperno, manager of customer service for credit scoring company Fair Isaac, which created the widely used FICO credit score. So the time and effort it takes to improve your credit score could save you hundreds of thousands of dollars over the course of your lifetime. For most people, a mortgage loan is where they’ll reap the greatest rewards from an improved credit score, otherwise the ramifications are costly.
With mortgage rates bottoming out a few months ago, Sept-Oct 2010, it is important that your scores are at the highest possible levels that you can achieve. That applies to people who have excellent credit scores and those in the low 600’s. Both can be qualified for a mortgage loan, but they will be at different rates. However, for people who have less-than-excellent credit, there are multiple ranges of scores and pricing that matches each range. I would say the difference between a low score of 600 and a high score of 740+, there will be a difference of 1% in the rate, which equates to almost $45,000 of higher interest paid over the life of the loan.
Breaking Down the numbers:
Median of 723 means that half of the people fall below that score and half of the people have scores higher. Here’s a breakdown of how scores are distributed across the population, according to MyFICO:
300-599 = 15 percent of the population (Unable to qualify for a mortgage loan)
600-649 = 12 percent (2 pricing levels in this category, 600-619 and 620-649)
650-699 = 15 percent
700-749 = 18 percent (740 and above is the new Creme of the scores, 723 is median)
750-799 = 27 percent
Over 800 = 13 percent
With The Mortgage Network of Ohio Inc, a consumer with a FICO score over 740 wold qualify for an FHA loan today and get a 4.75% rate on a $200,000 30-year fixed rate mortgage. That same consumer with a FICO score between 640-739 would get a rate that would be an eighth of a percentage point higher (4.875) on the same loan. Many lenders are saying “No” to clients with scores under 639. We have a program to assist those clients at elevated rates and for those borrowers with scores of 600-619, that rate would be closer to a full percentage point higher than the best scoring customer (about 5.75%) and if you are between 620-639, then that would be closer to 5.25%. Worse yet, a consumer with a score under 600 seems to be shut out of the market.