Why is a Credit Score So Important?

Part 18: As part of series of articles (blogs) regarding Credit and Credit Score, here we go:

Disclaimer:

Every effort has been made to make these articles as complete and as accurate as possible, but no warranty or fitness is implied.
The information provided is on an “as is” basis. The author shall have neither liability nor responsibility to any person or entity with respect to any loss or damages arising from the information contained in this book.

The author is not engaged in professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought.

Why is a Credit Score Important?

In today’s tough economic times, where every person is being evaluated and judged by a number (credit score), having a good credit score is essential to enjoy an appropriate standard of living. You need to have good credit just to rent an apartment, rent a car, open a bank account, get insurance, get a job, buy a car or obtain a home mortgage. Depending on your credit, you will be denied a loan, offered a normal rate, or offered a higher than normal interest rate, or required to put more money down, etc. Just a few points on your score can be the difference between getting a home or auto loan, or even a credit card. Similar to most cases in finance, those considered “low risks” get to pay the lowest rates.

To mortgage lenders, your credit score represents your likelihood of making on-time mortgage payment for the next couple of years. Therefore, it is very important to have a good/excellent credit history and credit score. You also need to know what is in your credit reports and what your credit score is.

Credit scores play a major role in determining which mortgage product or loan you will qualify for and what rate your lender will offer.

Table 1:  LLPA adjustment based on the LTV and credit score

Source: https://www.fanniemae.com/content/pricing/llpa-matrix.pdf
Published 9/20/2012
Note: For loans with LTV > 80%, an additional fee known as PMI (Premium Mortgage Insurance) will be added to the Mortgage payment.

Figure  1: Affect of FICO Score on Loan-Level Pricing Adjustment (% of the Loan Amount)

Assuming 20% down (LTV =80%)

 

Figure 2: Affect of FICO Score on Loan-Level Pricing Adjustment (Added Fee)

Assuming Purchase Price of $300,000 and 20% down (LTV =80%)

For a given LTV (Loan-To-Value):

·         The higher your credit score, the lower your Loan-Level Pricing Adjustments (LLPA) rate will be.

·         The higher your credit score, the lower your LLPA Added Fee + Mortgage Insurance will be.

·         The higher your credit score, the lower your mortgage or interest rate will be.

Example 1: A home purchased at $300,000 with 20% down carries a Mortgage loan of $240,000. LLPA added loan fees which are due at closing for borrows with a credit score of 741 and 655 are $600 and $7,200, respectively. As you see, the borrower with the lower credit score of 655 will pay an extra amount of $6,600 compared to the borrower with credit score of 741. This shows an example of a negative impact or cost of a low credit score on a mortgage loan.

Example 2: the monthly payment (Principal + Interest) of a $250,000 loan with 30-year fixed rate of 3.5% and 4.5% would be $1,266.71 and $1,122.61, respectively. A 1% increase in the interest rate in our example will cost the borrower an additional $51,876 in his/her 30-year loan term.

Conclusion:

Credit scores play a major role in determining which mortgage product or loan you will qualify for and what rate your lender will offer.

The higher your credit score, the lower your mortgage or interest rate will be.

If you plan to obtain a mortgage for your next home purchase or buy a car, you will want to keep your credit scores as high as possible.

You also need to know, preferably at any time, what is in your credit reports and what your credit score is.
By the Way, the time is 11:00 AM, do you know what your credit score is?

 

HOW to overcome the problems with your credit history and credit score?
Knowledge, education, awareness, practice and discipline are the essential keys to being successful on any subject. The book, "Credit Score Tips and Tricks", provides you information, tools, techniques to educate yourself and manage your credit report & credit score, and therefore manage your finances effectively at no additional cost.

I have decided to bring and share with you, chapters or sections of my book, Credit Score Tips and Tricks, as series of articles here. This is the number 18 of such a series.

I also created and manage a GROUP in ActiveRain, Credit Reports and Credit Scores, Please feel free to join and share your thoughts and experiences.

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