Buyers & Sellers, Contributor Article, Real Estate & Personal Finance

Buyers hurt by tougher credit scores

More lender flexibility needed for real loan growth

Maybe it’s just the point in our lives, but it seems that the availability of home mortgage money mirrors that of college tuition: There are some terrific programs for the needy, the wealthy always find a way, but those in the huge middle category often have few options.

Some longtime homeowners and perfectly qualified "new-generation" buyers who have been on the sidelines are having extreme difficulty in getting financing — or refinancing their present loan. The pendulum has now swung from "no loan ever rejected" to "no loan good enough for funding."

The new "risk-based pricing" introduced by Fannie Mae and Freddie Mac is a step in the wrong direction. In case you missed it, Fannie Mae and Freddie Mac — the two biggest players in the secondary mortgage market — recently announced they would add extra fees to offset "higher risks" and losses associated with certain credit scores and loan programs.

Credit scores, which are known as FICO scores and are generated by Fair Isaac Corp., typically range from a high of 850 to a low of 300. These numbers are compiled by the three national credit agencies. Most of the time, consumers who grade out above 760 get the best mortgage rates, those between 760 and 700 are in the middle and those under 630 usually pay the highest rates, if they can get financing.

Under the new guidelines, a borrower with a 699 FICO and a 25 percent down payment will be nailed with a 1.5 percent risk fee at closing. A buyer with a FICO score between 700 and 720 will pay an additional three-quarters of one percentage point. Someone previously judged to have very good credit — a 739 FICO — will be assessed an additional quarter-point fee.

For example, a young woman, 27, with excellent credit and a decent job, bought a home four years ago. She used her savings and a loan from her grandparents for the down payment. To keep payments at a minimum, she chose an interest-only loan and recruited longtime friends as roommates to help pay the monthly mortgage.

After four years of perfect mortgage payments plus a move to a better job, the woman began the process to refinance to a fixed-rate loan. To her surprise, her credit scores had dropped considerably, due to a late credit-card payment from her previous job. While her name was on the card, it was company business (custom printing, copying) and not her personal use. Before the card was transferred to her successor, a payment was missed.

After the missed payment, the woman’s credit scores from the three bureaus were 696, 706 and 756. Since most lenders take the middle score when it comes to mortgage qualifying, she was assigned a score of 706 on her loan documents, which then cost her an additional $2,364.

Here’s why:

A 706 credit score had a "risk-based" markup of 0.75 points based on her estimated home value of $420,000. (If the value had appraised at $425,000 or more, the add-on would have been only 0.5 points because her loan-to-value ratio would have been below 75 percent). If the middle credit score was 740 or higher, there would be no add-on at all.

"It was my fault for not following the timing of the business card closer," the woman said. "But should it cost me more than $2,300 even though I have paid my mortgage on time for four years? By the time I try to explain and get it worked out with the credit company, I lose my loan lock. I don’t want to gamble that rates will remain low when or if I ever get this straightened out."

The punishment doesn’t fit the crime — how things have changed. The "media" have been hammered lately by housing officials for reporting how difficult home financing has become and that there is plenty of mortgage money available for "qualified" buyers. It appears that qualified now borders on perfect.

Home inventories are high. In order to have any kind of loan growth in the residential market, something less than flawless credit must be made satisfactory to lenders.

Next week: Cleaning up your credit score.

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