Joe Gonzalez
Senior Loan Consultant
1st Metropolitan Mortgage
Phone: 610-351-7510
Fax: 610-351-7810

Credit Scores: Why Should I Care?

It's not just banks and lenders that rely on credit scores to help make important credit decisions. Landlords, employers, insurance companies, and even cell phone and other utility companies all reportedly utilize credit scores to help determine their business and credit relationships with consumers. This means that your credit is the most important component of your entire financial portfolio. Because of this, monitoring and managing your FICO score is vital, especially if you're looking to buy or refinance a home anytime in the near future.

The FICO scoring system was created in the 1950s by Fair Isaac Corporation and has been the standard for lenders since the 1980s. FICO credit scores typically range between a low score of 300 and a high score of 850. Under the FICO system, securing credit becomes less expensive for borrowers with higher scores (those who represent the least risk) and more expensive for borrowers with lower scores (those who represent the most risk). In fact, when it comes to a mortgage, a lower credit score could easily cost a consumer hundreds or even thousands of dollars more in interest every month and throughout the life of the loan, compared to the same loan with a higher score.

FICO Scores APR Monthly Payment Total Interest Paid
720-850 5.038% $1,617 $282,278
700-719 5.163% $1,640 $290,574
675-699 5.700% $1,741 $326,832
620-674 6.850% $1.966 $407,680
Below 620 N/A (1)    
Source: (30 year fixed-rate mortgage on $300,000) as of March 11, 2009
(1) People with these scores aren't usually accepted for this type of loan.

The above chart from clearly reveals the relationship between higher FICO scores and lower interest rates and monthly mortgage payments. Of course, interest rates are determined by many factors but the bottom line is that individuals with low credit scores will pay nearly three times more in interest than those with strong credit scores.

Now You Will Also Be Subject To Loan Level Price Adjustment Fees (LLPA’s) when applying for a conventional mortgage.

In addition to higher interest rates, having less than a 720 in today's credit environment can also cost you up to 3% in points or an increase in your interest rate! Here’s the chart based on an 80% LTV:

FICO Score LLPA You Will Pay
Below 640 3.000%
640-659 2.750%
660-679 2.250%
680-699 1.000%
700-719 0.500%

LLPAs are mandatory surcharges based strictly on credit scores. They are additional fees paid to Fannie Mae or Freddie Mac, not your mortgage professional. Analysts suggest that imposing these "penalties" is a blatant effort to recoup - and to help lessen further losses - on foreclosures. The surcharge could mean thousands of dollars for borrowers who do not monitor and maintain a good credit rating.

For people experiencing the worst-case scenario, carrying a middle credit score of less than 620 could cost you an extra $9,000 upfront on a $300,000 loan amount.

If you're thinking about buying, selling, or refinancing a home, you have to be credit ready. Give us a call today for a free credit consultation. We'll pull your credit and see where you stand. Remember, effective credit repair, if necessary, could take up to 3-6 months, so act now and be credit ready in no time.

Stay tuned for more great credit tips!

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