Your Credit Score May Cost Up to 2.5 points!

I had a disturbing situation come up recently for the first time on a conventional loan.

When applying for a mortgage a "tri-merge" credit report is ordered by the loan officer. Each borrower receives 3 credit scores, one from each credit repository, Trans Union, Equifax and Experian. The underwriter throws out the high and low scores and utilizes the middle score when determining credit worthiness. In the past a middle credit score of 620 was deemed acceptable as the minimum requirement.

In 2008 Fannie Mae and Freddie Mac were both near insolvency and as I am sure many of you are aware, the Federal Government stepped in and purchased both companies.
A decision was then made last year that going forward on any conventional loan borrowers could be subject to a potential fee in the form of points depending on their credit scores. This is referred to as either a "Loan Level Price Adjustment or "Risk Based Price Adjustment"
Recently that fee has been increased. Today, on a conventional loan and a credit score under 740, the borrower will be subject to paying points.

Here is an example. Say the borrower has a mid score of 673 and is putting down 20%. They will be charged 2.5 points! On a $200,000 loan that is an additional cost of $5000! If the middle score was higher at 680, it would STILL be 2 points.

This is ridiculous when a borrower is putting down 20%. How many borrowers today have 20% for a down payment?

This does not apply to government loans such as VA , FHA USDA, only conventional loans.

Don't be surprised when a borrower is told an ADDITIONAL $4000-$5000 will be needed for closing costs.

Usually someone who has shaky credit does not apply for a conventional loan. They apply for a government loan where if they have a 660 score there is no hit for the credit score. Under 660 down to 620 there is a hit but it is 1/4 point.

The main issue here is if someone has 20% for a down payment they would be better served with a conventional loan because there would be no PMI. With an FHA they would still have PMI and the UFMIP of 1.75%.