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John's Blog

By John Meussner | Mortgage Broker
or Lender in Costa Mesa, CA

Small differences in credit = BIG differences in mortgage costs

Calculating PMI (Private Mortgage Insurance) on a home loan can be a sticky area for some Realtors and even some inexperienced loan officers.  There's no easier way to lose the trust of a client than to under-estimate costs of a transaction, and PMI is one area where it's really easy to do so.  While many agents do a great job of estimating costs on their own, it leaves the door open to errors and the possibility for less than happy home buyers - it's a much better option to include a loan officer in that conversation.

     Everyone has caught up with interest rates being different for different credit scores, but not everyone is aware just how much the cost of PMI can vary with just minor changes in someone's FICO score.  It used to be if you had great credit, you'd get a great rate on your interest and PMI.  Now?  Let me see the credit score.  You're sure you've never been late on anything and you have great credit?  Still, let me see the credit score.

     Lets take a look at how much just a 21 point difference in credit score would effect a buyers costs, based on a very realistic example using todays interest rates: (Note : Each example is based on a $300,000 purchase price with 5% down - effectively a $285,000 loan amount - with a $799 underwriting fee, $16 flood cert, $20 credit report, and $800 in title company charges, conventional 30 year fixed loan product)

Scenario 1 - 719 FICO score
3.875% interest rate (3.922 APR)
.94 PMI factor (loan amount x .94% /12)
$1563/month principal/interest/PMI

Scenario 2 - 720 FICO score (yes, 1 point higher)
3.75% interest rate (3.783 APR) WITH $500 lender credit toward closing costs
.67 PMI factor
$1479/month

Scenario 3 - 740+ FICO
3.625% interest rate (3.657 APR) WITH $500 lender credit toward closing costs
.67 PMI factor
$1458/month

     As you can see, all 3 of these borrowers have excellent credit and likely no delinquent payments, at least not in their recent futures.  Sometimes a score can fluctuate this much based on just a few hundred dollars of credit usage, and in the above example could cost more than $100/month.

     This underscores the importance of using a loan officer that can not only calculate an interest rate and PMI correctly, but also one that is very well versed in credit scoring - if a clients FICO score is just under a different rate or PMI factor, it's important to know how to get those scores up ASAP!  Are your clients making it to the closing table with the best possible rate and loan terms, including the lowest possible PMI?

Content By: John Meussner, NMLS ID 138061
Visit my website at http://www.jmloans.com

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