The Price of Average Credit just Went Up

by Alex Stenback on November 21, 2007

Agency_share_priceAs you can see in the chart at right, the mounting losses at Fannie Mae and Freddie Mac, the two government sponsored enterprises who buy and guarantee 40% of US Home loans, have punished stock prices in the two mortgage giants.

And the buck won’t stop at investors portfolios.

Beyond the meltdown in share prices, the impact of these losses will soon be felt by the average consumer, when Fannie and Freddie begin charging a hefty new premium for borrowers whose credit scores fall below 680 – a solidly average number. Take a look at the table below:

Agency_credit_adjusters
Quick Translation: "Price increase to Discount" means additional up-front "points," as a percentage of loan amount required. LTV = Loan amount divided by sales price. Ex: 20% down = 80% LTV

In other words, if you are buying a $350,000 property, putting 20% down ($280,000 total loan amount) with a 659 credit score, you will be charged an additional 1.25% or $3500, for the same rate as a borrower with a 680+ credit score.  Though this premium can be absorbed by taking a rate .375-.5% higher (in lieu of the up-front charge,) it will still result in quite a hit for those with mostly average credit scores.

This is a big deal precisely because credit scores between 620-680, though not perfect, were fairly easy to lend upon even with a modest down payment, and rarely resulted in higher rates or fees.  Though timelines will vary, expect most lenders to implement these changes on loans closing after Dec 31st 2008 – right around the corner in real estate time.

Raising one’s credit score can take 60 days or more, so if you have not been taking an active role in managing your credit score, start now.  The price of average credit just went waaay up. 

Ready to turn over a new credit leaf? Here’s a couple of resources:
· AnnualCreditReport.com: The only source for truly free credit reports (though you will pay for the score.)
· My Fico: Loads of great information and credit management tools, straight from the horses mouth, Fair-Isaac. 

Mortgage Giants Fuels Worries with Steep Losses [WSJ]

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