Since 2013, mortgage rates have held near four percent, which has boosted the â€śamount of homeâ€ť a home buyer can purchase; and hasÂ increased the monthly savings available via a home loan refinance.
Historically, rates are incredibly cheap.
However, as many mortgage borrowers have learned the hard way, not everyone can access sub-4% rates.
For borrowers with conventional loans â€” loans backed by Fannie Mae and Freddie Mac â€” the ability to access these â€śbest mortgage ratesâ€ť is directly linked to their credit score.
The higher your credit score, the lower your mortgage rate. This is not news. Internet advertisements promising â€ścredit score repairâ€ť tout the credit score-mortgage rate connection liberally.
However, what you may not have known, is that with low credit scores, important loan programs can be unavailable or cost-ineffective â€” especially for borrowers wanting to use aÂ low down payment mortgage.
Borrowers with high credit scores get access to a wider mix of solutions.
You donâ€™t have to go far on the internet or in the papers to see â€śtodayâ€™s mortgage ratesâ€ť â€” theyâ€™re advertised everywhere. Youâ€™ve probably seen them a few times today already.
Whatâ€™s not always clear, though, is to whom those mortgage rates are available. The short answer is: Not everyone.
In general, the mortgage rates shown in an advertisement are geared at prime mortgage borrowers using conventional mortgage financing, where a â€śprime mortgage borrowerâ€ť is one with high credit scores and ample income and assets to support a home loan approval.
Prime mortgage borrowers also make a down payment of 20% or more on their purchase of a 1-unit home, with the home being established as their primary residence.
Because of this definition, many mortgage applicants are not prime borrowers, including borrowers using FHA loans with 3.5% down and VA loans with 100% financing (who often get better rates anyway); and, otherwise â€śgreat borrowersâ€ť who are looking to do a mortgage refinance.
Sometimes, the interest rate differential is stark, registering one percentage point or more.
Conventional loan mortgage rates vary wildly based on a borrowerâ€™s credit score.
Prime mortgage borrowers get access to the â€śbest and lowest mortgage ratesâ€ť you see advertised online and in print.
Everyone else gets access to something different.
Consider this illustration of two home buyers purchasing identical, neighboring homes at a price of $360,000. Both buyers plan to make the home their primary residence and both plan to make a 20 percent downpayment.
The buyers are identical is all respects except: One buyerâ€™s credit score is 740 and the other buyerâ€™s credit score is 680.
When the buyers apply for their respective home loans, one is categorized as a â€śprimeâ€ť borrower and the other is not.
The prime borrower, whose FICO score is 740, is quoted a mortgage rate near 3.75% with zero points. The APR quote is similarly low, yielding a monthly principal + interest payment of $1,390.
The other borrower, meanwhile, whose FICO score is 680, is quoted a rate of 4.25% with zero points. And, although still low in the context of history, the elevated rate reflects the bankâ€™s augmented risk.
The higher mortgage rate increases the borrowerâ€™s monthly mortgage payment by $86 versus his neighbor.
Over 30 years, this $86, which is paid monthly, yields $31,000 in â€śextra mortgage paymentsâ€ť as a result of having slightly banged-up credit as of the date of purchase.
$31,000 is more than 10% of the original amount borrowed!
With highÂ creditÂ scores, you get access to lower conventional mortgage rates. Good FICOsÂ also get you access to loan programs which would otherwise be unavailable.
Take the Conventional 97, for example.
The Conventional 97 mortgage is a loan program available via Fannie Mae. It allows for a downpayment of just 3% and, unlike the FHA's low-downpayment mortgage option, the Conventional 97 requires no upfront mortgage insurance premium.
However, to useÂ the Conventional 97, you must have a credit score of 680 or higher, which is right near the national average.
Borrowers with below-average credit scores, then, cannot use the Conventional 97.
They cannot use anotherÂ low-downpayment mortgage option, either -- the 80/10/10.
Often called a "Piggyback Loan", the 80/10/10 program is comprised of a first lien (i.e. mortgage) for 80% of a home's purchase price; a second lien, which is typically a HELOC, for 10% of the purchase price; and a ten percent downpayment.
HELOCs typically require a FICO score of 680 or higher. Borrowers without a 680 FICO, then, cannot access to the 80/10/10 program because they cannot get approved for the "10" portion of the loan.
Note: Plenty of loan programs remain available to borrowers withÂ less-than-perfect credit -- just notÂ allÂ of them. The higher your scores, the more options you'll have.
Today's mortgage rates are low. And, they're evenÂ lowerÂ for borrowers who can be considered prime. Shop for the best, low rates and see for what you'll qualify.
Get today's liveÂ mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Barry L. Systems Analyst
The Mortgage Reports is an excellent resource. I depend on the Mortgage Reports for the most up-to-date information regarding shifts in government policy and mortgage rate information in general.
Lorraine L. Medical Compliance
Thank you for The Mortgage Reports. I find your reports to be both helpful and informative.
Sarah M. Office Manager
The Mortgage Reports has been an invaluable resource to me -- it helped me to pick the sweet spot to refinance. Thanks!
2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)