While our basic interest rates have remained low and steady over the past two years (30 year fixed principle and interest loan has been in the low to mid 6% range with zero points), the “pricing adjustments” from the banks have skyrocketed over the past 6-9 months.  The detail of these costs has never been conveyed to the consumer by the media, for whatever reason.  Maybe the overly-vague and generic term of ‘credit crunch’ fits their needs.

These price adjustments, better known “layering” to the banks and to mortgage professionals, adds costs to the borrowers’ loan and/or rate, depending on the category.  Such categories include pricing penalties for: less money down; taking cash out on a refinance; taking an interest only loan; and most punitively—lower credit scores.  The latter is the biggest change we’ve seen, started around the first of the year—and has grown since.

The best analogy I come up with for loans, relative to credit score, is that we used to be a —> Pass or Fail.  Now, it’s like you’re graded from “F to A+.  For example, a 620 score used to get an automated Fannie/Freddie approval all the time, with decent credit variables and 5% down.  Now a 620 score costs the borrower 2.5 points!!!  Or, if it’s built into the rate, today that would be a 3/4% rate penalty to a borrower’s final rate.  Even if you have a 719 Fico score, you are hit with a .5 fee (or 1/4% rate penalty). 

So if you have a $250,000 loan, a 620 score will cost you $6,250; or a rate 3/4% higher—> which is $150 a month higher with this loan amount.  With a 719 credit score, the adds are $1250 loan costs, or a $41 monthly payment bump.   These are for Fannie Mae and Freddie Mac loans, better known as conventional loans.

On FHA (HUD/Govmt 3% down) loans, there are only price hits for scores below 620.  Borrowers with scores ranging from 580—620 can expect pricing hits between 1% to 3%, usually it’s 1%.  Below is the standard Freddie/Fannie (conventional loans) pricing adjustment grid for credit scores.  Keep in mind, this doesn’t show additional adjustments for cash-out, 2nd home/Investment property, interest only, loan size, condo hits, etc