People Who Do Not Know, Should Stick To What They Do Know. I don’t know why I still get irritated when I read articles like the one in MReport.com last week, about a Zillow study reporting 3 out of 10 Americans are unable to obtain a mortgage to purchase a home. The article did get it right by stating the reason is because these Borrowers have low Credit Scores. I agree with their statement, in fact in my opinion it is more than 3 out of 10 Borrowers who are not able to obtain a mortgage today because of low Credit Scores. So why did the article irritate me?
I was irritated by the article, because it suggests Lenders should be approving Mortgages for people who don’t pay their bills. If they don’t pay, or can’t pay the bills they have now, what makes them think they will pay a Mortgage without first showing the have changed how they manage their finances. These are the same people who not to long ago were criticizing Lenders for approving Borrowers for Mortgages they could not pay for.
The article went on to state “mortgage availability remains tight”. Mortgage availability is not tight, there is plenty of money to lend, what is tight are the guidelines to qualify for them.
That is when I started to get irritated, but what really did it was the next statement stating “According to Zillow’s analysis, the lowest rates are currently reserved for those with credit scores of 740 or higher”, this is simply not true. Credit Scores impact a Borrowers ability to qualifying for a Loan Program, and the points a Borrower may pay once they qualify for the Loan Program, but they do not impact what the Interest Rate will be. For example, if a Borrower needs a minimum Credit Score of 640 to qualify for a Loan Program, it does not matter if their Credit Score is 640 or 800, once the Borrower qualifies for the Loan Program the Interest Rate will be the same.
What further showed the writer the article or Zillow did not know what they were talking about, was making a comparison between the Interest Rate and the APR. The two are VERY different. The APR is not an Interest Rate, it is a Percentage which attempts to reflect the costs of the loan for shopping purposes. What made it very obvious to me they did not know what they were talking about was the following statement:
“In the 2013 study, Zillow found borrowers with credit scores of 740 or above received an average low annual percentage rate (APR) of 4.42 percent for conventional 30-year fixed mortgages.
Borrowers with mid-range credit (between 620 and 739) received APRs between 4.47 percent and 5.09 percent, and those with scores below 620 received too few quotes to even calculate the average low APR.”
The reason why the APR is higher on a conventional loan for a Borrower with at Credit Score below 740, as apposed to a Borrower with a Credit Score of 740+, is because of the points Fannie Mae charges a Borrower based on their Credit Score. For example if a Borrower is has a downpayment between 5% to 24.9%, Fannie Mae would hit them with the following points based on their Credit Score:
- 740+ .250 points
- 739-720 .625 points
- 719-700 .1.25 points
- 699-680 .1.375 – 1.875 points
- 679-660 .2.500 – 2.875 points
- 659-640 .3.000 – 3.250 points
- 640-620 .3.250 – 3.500 points
As you can see every time the Credit Score drops by 20 points the Points Fannie Mae charges go up. As a result the APR goes up because of the higher closing costs, not because the Interest Rate increased. The Interest Rate stays the same as long as the Credit Scores stay within the Loan Program qualifying limits, and do not change because of the Credit Score.
There is enough miss information out there. We do not need organizations like Zillow who people trust and think they know what they are talking about, making statements which are not even close to being true. People Who Do Not Know, Should Stick To What They Do Know, and Reporters should take the time to verify what they are reporting before they report it.
Info about the author:
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