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Until recently, a FICO score of 720 was enough to qualify you for the best mortgage rate. Credit-wise, at least.Other than bragging rights and a safety buffer if you score dropped a little before applying, anything above a FICO of 720 didn’t matter.It became slightly harder to qualify for a good rate of interest when you apply for a mortgage after the FICO 740 threshold was introduced.Fannie Mae & Freddie Mac have now upped the ante and are likely to sting anyone looking for a mortgage.There are now two FICO thresholds that apply to most conforming loans. There are two brackets: 760+ and 780+.
A 780 FICO score is important for mortgages now
If you are not aware, all mortgage lenders use pricing adjustments to adjust the price of loans.The list can include the property type, occupancy rate, loan type , loan to value ratio , credit score and more.The score of the borrower is a significant factor when it comes to loan pricing, since it can play a role in default rates.A borrower who has a better FICO score will be offered a better rate on a loan because they are a lower risk of default. It’s also true that the opposite is true.In the past, you needed only a FICO score of 720 to get the best price on a conforming loan.Next came the 740 level, which made it a bit harder.Fannie Mae or Freddie Mac will now require a FICO score of 780 if you wish to get the best possible price on your mortgage.
Why Are Fannie Mae and Freddie Mac Upping Credit Score Requirements?
The FHFA overseeing Fannie and Freddie wants them to concentrate more on the underserved borrowers.The GSEs are now able to raise capital by introducing new pricing tiers for all borrowers.The FHFA is of the opinion that it’s important to “develop a pricing structure for single-family purchaser borrowers who are limited by their wealth or income while also creating a level playing ground for both large and small sellers …”
In practice, borrowers with low FICO score and/or small down payments may see their loan prices improve due to favorable price adjustment changes.Home loans for traditionally strong borrowers, such as those with high FICO scores and large down payments, may become more expensive.There are a lot of changes coming but the one that stands out the most for me is the new credit score tiers, which have a 760-779 and a 780+.Before this change that takes effect on May 1, 2023, you only needed a FICO score of 740.
To qualify for a mortgage loan after these changes, you will need a credit score of at least 780.
The mortgage pricing will get worse for many borrowers with FICO scores between 700 and 779
As shown in the second graph above, a borrower who has a FICO score of 740 and 80% Loan-to-Value (LTV) would see a price adjustment for credit scores of 0.875%.This compares to 0.375% if the borrower has a FICO of 780+ and an 80% LTV. This is a difference of.50%.This would mean an mortgage rate of.125% more or $2,500 extra upfront.The buyer of a home who pays 20% but only has a score of 740 (traditionally a great credit score) will pay either more in closing fees or receive a slightly increased rate.It is somewhat of a good thing that a borrower who has a FICO score above 780 will see their price adjustment drop from 0.50% to 0.375% (prior this change). Both charts are available.Others will be affected, like a borrower who has a FICO score of 739 and 20% down. Their costs will increase by 0.50%.These adjustments are only applicable to mortgages with a term greater than 15-years, also known as fixed 30-year mortgages.When we talk refinances with cash out the credit score hit will be 1.375% for a borrower who has a 780 credit score at 80% LTV.Before this change, even a borrower with a lower credit score (740+ FICO) was subjected to the same price adjustments.The price adjustment for the 740+ borrower that wants to cash out up to an 80% LTV is going to increase to 2.375%.This 1% fee increase is $5,000 for a loan of $500,000. Or, again, a higher mortgage rate. Ouch.Refinancing is not advisable, given the recent rate hikes.
Do I need a FICO score of 780 to get a mortgage?
You don’t need to have a 780 score FICO in order to obtain a mortgage. The minimum FICO score of 620 for conforming loan is not changing.If you WANHT to get the best mortgage rates, then you will need a FICO score of 780 or higher. A score that is 40 points higher than what was previously considered the top tier.To get the best price, you’ll need to have a higher credit score. This change does not exclude anyone.It makes mortgages more affordable to those with low credit scores. Even removing the “620”, “620-639”, and replacing them with “= 639”.Depending on your credit rating and down payment it may or may not have an impact. It may even result in a remarkably lower price.A borrower with a FICO score of 620 and a down payment of 5% will see their price adjustment fall by an incredible 1%.This could translate into an interest rate that is.25% -.50% less, or even a reduction in closing costs. A borrower who has a 3% deposit and 620 FICO score will also see a price reduction of 1.75%.This could lead to a lower mortgage rate of.50%, or even more depending on the lender.Remember that all LLPAs will be waived on HomeReady Loans and First-Time Home Buyers loans with incomes qualifying.