How does your FICO score affect the mortgage rate
Posted by Frugal on February 21st, 2007
I found this quantitative matrix for the lending mortgage interest rate as a function of your FICO score and the LTV (Loan-To-house-Value) ratio. I have saved a copy here just in case the link is no longer available.
The matrix (in A1) makes total sense to me. If I am a mortgage investor, the mortgage interest rate should be dependent on the risk that I would take, which could be roughly measured by FICO & LTV. Although I don’t really understand the difference between A1, A2, B1, B2 tables, the more important message to take home here is that if your lender is not giving you a better interest rate on a lower LTV, your case is probably adding to his or her bottomline. For a FICO of 700, there is a 0.30% interest rate difference between 80% LTV and 65% LTV. A 0.30% on the mortgage rate can translate into a lot of “current” money.
By the way, this matrix is from the recently bankrupt ResMae on 2/13/07. This subprime lender was asked to swallow back $300 million loans purchased by Merril Lynch. Time after time, lenders just don’t realize that you cannot make a deadbeat to pay up when he just doesn’t have any money. You can sue and win, but you will simply lose more money in legal fees.
On the last note, I don’t know whether these lenders who use this matrix has ever thought of the “monetary value” of a FICO score. Anything that you can “quantify” (like a FICO score) you can fake too. Between walking away from a upside down loan worth of $100K and a perfect FICO score, which one would you choose? Despite my strong ethical sense, when $100K increases to one million dollar, I think I may walk away too. If I do that, I would have just “quantified” the monetary value of my ethics/FICO score, worth of a million dollar unpaid debt.
In reality, you can almost always put a monetary value to everything (sorry to be a little cynical here). But of course, I’m glad that my ethics won’t put myself in this situation of owing 1 million today’s dollar of mortgage in the first place.
I do hope that the “monetary value” of my ethics will grow bigger as I grow. But I do know for a fact that when given a real choice, the “monetary value” of people’s ethics is smaller than both the creditor or the debtor thinks. At least, I think this applies to me.
Fremont General just announced that they will not do piggyback loans (80/20). It’s another proof of LTV is a better safeguard than FICO scores.
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February 22nd, 2007 at 12:00 am
This is a great topic for me as I am currently trying to “shop” for a loan. It is very tough to compare Apples-to-apples. I have excellent credit, but it seems no lender is passing on the savings back to me. I always try to hide my credit score, telling them something else lower, and it seems it doesn’t make any difference to the quoted rate.
Do you have any website that lenders are genuinely dropping their commissions/lender’s margin to offer a great loan product??
Anyways, recently took a look at my credit report. Both TransUnion & Experian gave me identical scores. And, their highest credit category is called “Super Prime”. Whatever that means…. And, Equifax gave me a FICO score. FICO is now a registered trademark of Equifax. How silly! Anyways, FICO was the lower of the 3 numbers. The difference was 61 points.
February 23rd, 2007 at 7:24 am
@ Mike:
Have you tried PenFed? They won’t screw with you, and anyone can join this credit union via the NMFA organization with about a $25 donation. Here’s a thread on Fatwallet.com with people explaining their experiences with Penfed’s HELOC product. Seems like decent experiences overall.
March 3rd, 2007 at 7:53 am
A1 (0 x 30) means that a prospective home buyer has not been late on any payments by more than 30 days. A2 (1 x 30) means that a person has been late 1 time by more than 30 days on a loan payment. B1 (3 x 30) means that a person has been late 3 times by more than 30 days on a loan payment, and so on.
The key number to look at is the “0 x 30″, “1 x 30″, 3 x 30″, and so forth. This helps the lender classify a propsective home buyer. The A1, A2, B1, B2, C1, and C2 titles simply give the loan a classification and a name. Think of it like the bond market. A-rated bonds are lower risk than B-rate bonds. This system is used in the mortgage industry as well, in a similar way.
I hope that clarifies the left-column of that document. I noticed that you were curious what they meant —- and my mortgage broker wife was able to enlighten me as well! Thought I’d pass on the information!
-NetWorth
http://www.networthchallenge.com
March 6th, 2007 at 4:50 am
Thanks NetWorth.
There was no way that I could figure that out by myself,
.
March 11th, 2007 at 10:36 am
How far back do they check in order to classify an applicant as A1, A2 etc?
Do they go back 2 years, 7 years, or more?
Thanks.
March 15th, 2007 at 12:35 am
That’s a question for a real mortgage originator.