In response to the higher mortgage foreclosure rates being experienced at the start of the most recent Recession, Fannie Mae and Freddie Mac (currently the largest buyers of mortgages) established “Risk-Based Pricing” for Conforming loans. “Price” refers to the “Points” paid by a borrower for a particular interest rate. Before the Recession, a Conforming loan was basically the same price for any borrower with a credit score of 660. But afterwards, Fannie and Freddie both required pricing “add-ons” using a matrix of credit score and loan-to-value percentages. This risk-based pricing is MANDATED by Fannie and Freddie, and is required of ALL lenders originating Conforming loans. So it doesn’t matter where you go to get your Conforming loan—broker, banker or online—all lenders are subject to the same pricing adjustments.
At right is an excerpt from the adjustment matrix for a typical 70-75% loan-to-value loan. As you can see, having a 739 credit score instead of a 740 credit score can add a quarter of a point onto the cost of a loan. Having a 699 score could add one and a quarter points onto the cost of a loan. On a $400,000 loan, this could amount to $1000 or $5000. On a $600,000 it could amount to $1500 or $7500.
Sometimes the interest rate can be increased to cover these add-on points without having to pay them up-front, but of course a higher interest rate just spreads the cost over the life of the loan.
Credit scores are just one factor in pricing a loan. Loan-to-value, property type, and whether the home is owner-occupied or not can also affect pricing. Consumers can’t always just call a lender and say “what’s your rate?” because of all the variables involved. Any reputable lender should be upfront and clear that any quote given is based on an assumption of certain parameters, and some of these parameters aren’t know until a credit report is obtained, and an appraisal is done.
I am here to provide honest, straightforward advice. If I can be of any assistance to you, your friends, or your family, feel free to contact me. I will take care of you and your referrals in the same upfront fashion as I always have.
Thanks for your interest,
Dan Marchiando, your California Mortgage Broker and Loan Officer.