Whether you are a first-time buyer, experienced home buyer or someone who wants to buy multiple rental properties, the subject of your credit score will come up. You may also hear this referred to as your FICO score. Something you may not know about though is loan level price adjustments (LLPA), also known as mortgage fees which are determined by not just credit score but also loan to value ratio, owner occupancy and debt to income ratio. So just how much does a credit score matter when buying a house and how much does it matter when the new LLPA structure begins on May 1st. The following factors will help break down a credit score when it comes to buying a home, especially in a hot real estate market like Denver:
What is the new LLPA structure and what does it mean for me?
I’ll be posting in-depth about this next week but basically, starting on May 1st, mortgage giants Fannie Mae and Freddie Mac will be putting in a new fee structure for mortgage fees that specifically pertain to credit score. Typically, those with poor or fair credit scores pay more for any loan, including home, but with the new structure that could change. For example, those with credit scores under 679 will still pay more but home buyers with credit scores at 680 could now pay a lower percentage fee and unfortunately those with high credit scores could potentially pay more, depending on their loan to value ratio.
Does credit score matter when buying a house?
When putting your home loan together, an underwriter looks at multiple factors of your financial reality including: credit score, income, savings, payment history on everything from a car loan to a credit card and length of employment. Also, if you’ve had a history of paying a mortgage or rent, this is factored in as well. When buying a home in a hot market like Colorado, any competitive advantage you have can matter when a seller is entertaining multiple offers and this could include having a strong credit score.
Does credit matter when buying a house?
This answer varies, depending on your loan type and how much you’re borrowing and of course, this may change with the new LLPA structure is introduced. For example, USDA and VA loans have credit minimums, while FHA loans can actually be written with no credit, which allows underwriting to factor in other aspects of your financial situation to help approve the loan. Also, if you don’t have a history of credit or you have no credit score, that can factor in as well and may even require a co-signer.
I’m worried my credit score isn’t high enough?
A very common concern for many homebuyers, again it depends on your loan type and the rest of your financials. When looking over your loan, a mortgage company will look at the three main credit bureaus and the one that matters the most is the average, or the middle, of the 3 main bureaus: Transunion, Equifax, and Experian. If you’re concerned about your score being too low then do what you can to eliminate debt like paying down a credit card, car loan or student loan. If you aren’t able to do much about your debt to income ratio, you may also be able to consider applying for a new job with a higher salary or increasing your income. You may need a co-signer if you have no credit or low credit as a back-up plan.
Can a good credit score actually cost me money with the new LLPA?
The general rule used to be that having a good credit score would save a buyer money in the long run with a lower interest rate and thus less money paid over the life of the loan. However, depending on loan to value ratio and credit score this could change under the new LLPA structure, and I’ll be explianing that in-depth next week.
What questions do you have about LLPAs? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]