Risk-Based Interest Rates : Chicago RE with Julie

Risk-Based Interest Rates

Posted at 3:17 AM, Feb. 13, 2008

Well here comes the backlash for all those with less than perfect credit scores. The government-backed entities that control the secondary market, Freddic Mac and Fannie Mae, have now imposed fees (or points) to borrowers who are less than desireable in terms of credit risk. So, even though there are still speciality financing programs available, for A paper loans, buyers will be paying an additional fee or interest rate hike if they fall below the margin. Every bank is different, so consult with your local lender with how this affects you!

The following information has been provided courtesy of Marianne Mandel of Integra Financial Group.

The Changes for New Loans

All Fannie Mae and Freddie Mac loans will now be risk based interest rates based on credit scores. It will only affect loans with 70% LTV (loan to Value) or greater and borrowers with 679 or lower credit score. The tier will look something like this:

660-679

640-659

620-639

619 or lower

I can’t say exactly what the hits will be to the borrower because its to the wholesale pricing (or Yield spread), but basically one can assume that the lower the score, the higher the rate. For example someone with a 680 plus credit score and a 90% LTV can obtain a rate of 6%, with a 660-679 score your rate could be between 6.25% and 6.375%, with a 640-659 score your rate could be between 6.375% and 6.625% , with a score of 620-639 your rate could be 6.625% to 7.00% and with a score of 619 or lower your rate could be 7.00% to 7.25%. It’s difficult to speculate what the rate difference is exactly because banks price loans differently everyday, but ¼ to 3/8ths per tier is a somewhat accurate calculation. This means that now more than ever are credit scores important in your financial profile.