GREENSBORO, N.C. — For so long it's been drilled in all of us that people with great credit scores get the best deals on loans. But you might have heard starting May 1 there could be cases where people who have middle of the road scores will pay less than people with stellar scores. The rumor is all over the internet, but it's not quite true. There are changes coming to how much a federal backed home loan will cost. And your credit score won't be as important as it used to. Let's Dig In 2 It and get you the full truth. Starting with the perspective of mortgage loan officer Al Bingham.
"It's a really big change," Bingham said. "It's going to hit the consumer hard when they go apply for a mortgage."
The changes are to the federal government's up front fee to guarantee a home loan. Basically the upfront fee to guarantee they will pay the bank off if you go into default. We talked with the federal organization making these changes: The Federal Housing Finance Agency. They said the updated fees are because of a new study about which loans are most likely to default.
They found a high credit score did not always line up with a low risk of a loan defaulting. For example, a person may have a near perfect credit score - but own five houses. The FHFA says they are more likely to default than someone with a lower credit score who only has one house that they live in all the time.
So in addition to credit score, they are considering if your loan an adjustable-rate loan, is this a manufactured home, a multi-family unit, and how much is your debt to income ratio. If all those factors and a few more are exactly the same between borrowers, credit score will still make a difference.
"Identical borrows applying for an identical product all things being equal will have the higher credit score borrower paying lower up front fees," said Michael Shemi, a principal advisor for FHFA’s Division of Housing and Mission Goals.
Bottom line: Starting May first, credit scores will still be important, but not as important as they were before. This will not impact you if you already have a current loan on your house.
The big question is how much will your bill change under the new arrangement? I would LOVE to answer that for you but the truth is it depends.
The FHFA and mortgage brokers say there are a ton of factors that will go into deciding the rate for your loan and each case will be different, so it would be unfair and inaccurate to give an example of the change in price. The best thing you can do is talk with a mortgage broker before you start looking for a new home. They can give you a more accurate price of getting a loan.