Your FICO score has always influenced the mortgage rate for which youâ€™re eligible. In 2008, though, it began to change your loan fees. (You have three FICO scores one from each credit bureau)
In response to major mortgage market losses, in April 2008, both Fannie Mae and Freddie Mac introduced something called Loan-Level Pricing Adjustments (LLPA).Â Loan-level pricing adjustments are â€œdiscount pointsâ€ added to a mortgage rate, based on a specific borrowerâ€™s risk to the lender.
A discount point is a loan fee, paid at the time of closing. 1 discount point is equal to 1 percent of your loan size.
Example : A $300,000 mortgage thatâ€™s assessed 1 discount point will have $3,000 in extra fees due at closing.
Fannie Mae and Freddie Mac know that low credit scores correlate to high default rates so, like an insurance policy, they assigned the highest costs to the highest-risk borrowers.
Assuming a 20% downpayment, look at how discount points change based on credit score. Fees get massive for FICOs under 700.
Now, not many new home buyers just have that kind of extra cash just laying around. Therefore, as an alternative to paying discount points with cash, many choose to â€œroll upâ€ the fees into their respective mortgage rates.Â In general, 1.000 discount point can be â€œtraded inâ€ for a 0.250 increase to your mortgage rate.
Example : A consumer with a 680 FICO score is required to pay 1.500 discount points at closing, or can alternatively accept a mortgage rate increase of 0.375%.
This is why itâ€™s important to keep your credit score high. There are real dollar costs for having scores under 740.Reference: http://goo.gl/qRnci