One of the first things I ask a new client considering a refinance or any kind of debt is, do you know your credit score? Your FICO score is the most important number that the banks and other lenders use to identify what type of credit risk you are. FICO scores run from 300 to 850 with the upper end of the scale indicating a lower risk of default on the loan. It is essentially the key to understanding who gets the best rates on loans and who has to pay more.
The numbers reveal what should come as no surprise to anyone: it is getting tougher to get a new mortgage without having a FICO high score. The data show this consistency across three types of mortgage applications, Purchase, Refinance and Conventional mortgages.
• The majority (ranging from 32-41% of applicants across Purchase, Refinance and Conventional mortgages) had FICO scores between 750-799
• 23-24% of applicants had scores ranging from 700-749
• 12-21% of applicants had scores ranging from 650-699
• Less than 10% of borrowers across all three categories had FICO scores below 649
• 13 to 19% of all applicants had scores of 800+
(from June 2016 Ellie Mae Loan Origination Insight Report)
The alternative to a low FICO scores is more expensive financing. The Federal Housing Administration insures mortgages for the majority of loans below 700 (56% had FICO scores between 600-699). Its role is to provide homeownership for applicants that would otherwise not qualify for a mortgage. However:
• A disadvantage is required mortgage insurance ranging from 0.85 to 1.35% of the loan upfront and added to the balance of the loan.
• While conventional borrowers can get rid of mortgage insurance once their equity reaches 20% of the value of the home, FHA borrowers must pay mortgage insurance annually for the life of the mortgage.
Credit reporting bureaus Experian, TransUnion and Equifax will provide a free credit report but credit scores must be purchased. Clients should review their reports at least bi-annually for all credit lines that remain open and any unusual activity.