MORTGAGE borrowers might be forgiven for sometimes feeling like victims of a bait-and-switch scheme.
For the last year or so, news has been trumpeted about historically low interest rates on 30-year fixed-rate loans; the rates tilted near 4.5 percent late last year and are now hovering above 5 percent. But when a borrower calls a mortgage broker to secure such a rate, he or she often fails.
That’s because many borrowers have a credit score below what is considered “prime,” according to Experian, one of the major credit-reporting agencies. On a scale of 501 to 990, Experian puts the average score at 771. (FICO, which developed the most widely used scores for assessing credit risk, doesn’t publish an average figure but says the median credit score is 720, on a scale of 300 to 850.)
And under current guidelines from Freddie Mac and Fannie Mae, the government agencies that set lending standards for most mortgages sold in the United States, only those borrowers with credit scores of 740 or more, and a down payment of at least 20 percent, can avoid extra loan charges that could effectively raise the mortgage rate.
Borrowers with credit scores of 700 to 740 typically face additional charges of one-quarter to three-quarters of a percentage point of the loan amount. On a $200,000 loan, that amounts to $500 to $1,500, which can be paid up front or converted into a marginally higher interest rate.
But for borrowers with credit scores of 680 to 700, the charge is 1.5 percentage points, and for those between 660 and 680, the charge is 2.5 percentage points. On a $200,000 loan, the extra 2.5 percentage point fee can add roughly half a percentage point to the interest rate.
Fannie and Freddie started aggressively increasing prices on loans to higher-risk borrowers in 2008, said Guy Cecala, the publisher of Inside Mortgage Finance, an industry trade publication. In August 2008, for instance, borrowers with credit scores of 680 to 700 incurred a charge of one percentage point of the loan amount, when making a down payment of 20 to 25 percent.
