YOUR FICO SCORE VS Interest Rates

I spoke to John K.  at First Union Mortgage & Trust about the differences among FICO scores and how that relates to the interest rate borrowers are charged. The following numbers are in comparison to the interest rate a borrower with a 600 FICO score would pay who did not file bankruptcy or lost a previous home to foreclosure. This scenario assumes the borrower with bad credit is putting down 10% of the purchase price in cash and met the seasoning requirements above.

• FICO Score of 600 to 640: + 1.625% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 7.5%.

  A $200,000 amortized loan at 7.5% would give you a monthly payment of $1,398.

• FICO Score of 560 to 580: +2.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 8.75%.

  A $200,000 amortized loan at 8.75% would give you a monthly payment of $1,573.

• FICO Score of 540 to 559: +3.425% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.3%.

  A $200,000 amortized loan at 9.3% would give you a monthly payment of $1,653.

• FICO Score Under 540 to 500: +3.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.75%.

  A $200,000 amortized loan at 9.75% would give you a monthly payment of $1,718.

• FICO Score Under 500: +6.25% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 12%. With a FICO of less than 500, you will not qualify for a 90% loan, but you may qualify for a 65% loan, therefore, you need to increase your down payment from 10% to 35%.

  A $200,000 amortized loan at 12% would give you a monthly payment of $2,057.

Comparing Identical FICOs Against Borrowers With No Foreclosure or Bankruptcy

A borrower without a bankruptcy or foreclosure with a 600 FICO would receive an interest rate of 5.875% and pay a monthly payment of $1183 on a $200,000 amortized loan. You can see that filing bankruptcy or having a foreclosure on your record, even with a FICO score of 600, results in an increase in a mortgage payment of $215 over that of a borrower without a bankruptcy or foreclosure. However, that difference in payment will let you buy a home.

Alternative to Bank-Financing

Borrowers who are not satisfied with the rate offered by a conforming lender might want to look at buying a home with seller financing. Land contracts offer a viable alternative. Typically, seller financing offers:

• No qualifying.
• Lower interest rates.
• Flexible terms and down payments.
• Fast closing.

You will want to check with your lender every year or so to find out if you qualify for a refinance at a lower rate.