The tight economy isn’t just eating away at Americans’ pocketbooks. It is affecting FICO score requirements as well.
Recent data suggests that to get the very best terms on mortgage loans, excellent no longer suffices. It may be that only those with stellar credit get to take advantage of the record-low rates that are currently available on 30-year mortgages.
According to the Mortgage Bankers Association, as reported in Mortgage News Daily, almost half of new mortgage loans — 46 percent — written in the first quarter of this year were issued to consumers with credit scores above 750.
In contrast, less than one third of new loans in the third quarter of 2008, just before the onset of the credit crisis, were issued to consumers with scores above 750. (FICO scores, the credit score used most often by lenders, range from 300 to 850, and any score above 720 used to be sufficient to get the best mortgage terms.)
It is now much harder for consumers on the lower rungs of the credit range to get approved for a mortgage, according to recent data by the Mortgage Bankers Association. Scores that used to get you approved for mortgage loans now make most lenders thumb their nose. In fact, fewer than one in ten loans (9 percent) were issued to borrowers with FICO scores below 650 points, reports Mortgage News Daily.
The shift in FICO score requirements is part of a continuing fallout from the credit crisis of 2008 and the ensuing economic downturn, say experts.
“The mindset has shifted significantly, and banks are much less risk tolerant,” says Michael Rubin, author of “Beyond Paycheck to Paycheck: A Conversation about Income, Wealth, and the Steps in Between.” “Up ‘til the second half of 2008, banks weren’t as cautious. It was all about lending. Now, banks screen consumers much more carefully to make sure they get paid back.”
What it means for your next mortgage
If you’re planning to take out a mortgage within a year or two, it’s time to get serious about your FICO score. Even small, seemingly innocuous decisions, like applying for a credit card, can affect your score — and your mortgage terms — considerably.
“Every time you apply for credit, you get a hard inquiry on your credit report, which takes down the score a few points,” says Joe Ridout of the consumer advocacy group Consumer Action. “You’d be surprised once you calculate what even a few points off the score are worth to you.”
To get an idea of just how much FICO scores affect loan terms, check out the FICO Loan Savings calculator at MyFICO.com. On a $250,000 30-year fixed-rate mortgage, for example, the difference in interest payments between a credit score of 760 to 850 and a credit score of 700 to 759 translates into a $11,535 savings on interest over the 30 years of the loan.
Higher credit scores don’t just enable you to save thousands of dollars over the life of a 30-year mortgage. They also help you afford a bigger house because the lower interest rates translate into lower mortgage payments.
For example, someone in the 640 to 659 FICO score range could decrease their monthly payment on a $250,000 mortgage by more than $100 a month — from $1,335 to $1,213 — by improving their credit score enough to move into the 700 to 759 range.
They would also save a whopping $44,012 in interest payments over the course of a 30-year loan. Not bad for doing a bit of credit score planning before applying for a mortgage. (Note: The FICO Loan Savings calculator uses prevailing rates, so these amounts will fluctuate with mortgage rates).
And remember: FICO scores don’t just affect what you pay for a mortgage loan. They also affect how much you pay for other major life expenses, such as premiums on car insurance. That’s why it makes more sense than ever to stay on top of your score, say experts.
“Keep the larger picture of your finance situation in mind, even when making small financial decisions like applying for a credit card,” says Rubin. “We all play these games with credit cards to get better rates on balance transfers or better cash back rates on purchases. But to the point that this throws your FICO score, you could end up costing yourself so much more than you ever save.”