We’re Going to Review the Advantages of Having an “Excellent Credit Score”. This typically refers to someone with an excellent mix of credit and a long history of repaying their debts on time.
Dating back to the summer of 2019, interest rates for residential mortgages have been close to record lows, which has increased the purchase price for home buyers; and lower rates have helped homeowners refinance and experience a comfortable savings every month.
However, not every borrower will be able to obtain these record low interest rates. A number of factors play a role such as length of credit history, length of paying an account on time, and type of credit.
For borrowers with credit scores below 680 seeking a jumbo mortgage, it will not be as attractive as someone who has a 720 or higher score. This point becomes even more amplified for those with credit scores below 680, especially for borrowers who want a low down payment jumbo mortgage.
Borrowers with credit scores over 700 qualify for a variety of jumbo loan products
As expected, the best mortgage rates are available for borrowers who have impeccable credit, adequate income and liquid assets to obtain a loan approval by the lender.
In addition, these credit worthy borrowers also have a 20-percent down payment or more on their purchase of a single family home as a primary residence.
With a 5 or 10-percent down jumbo loan, the interest rate difference is huge, with rates being higher by one percentage point or more.
The Difference Between a 720 & 680 Middle FICO Score for Jumbo Loans
Let’s look at the following scenario of two home buyers purchasing identical homes in the same neighborhood at a price of $1,000,000 each as a primary residence. Both want to make a purchase with a 10-percent down payment, or $100,000. The glaring difference of the buyers are one has a credit score of 744 and the other buyer’s credit score is 685.
The borrower with a middle FICO credit score of 744, is quoted a mortgage rate near 4.75% with .375 points. The APR quote is likewise low, giving them a monthly principal + interest payment of $4,695.
The other borrower, whose middle FICO credit score is 685, is quoted a rate of 5.75% with 1.375 points. The monthly payment is $5,252. The APR is just under 6. While the rate is still historically low, the higher rate is a reflection of the lender’s increased risk.
The higher mortgage rate increases the other borrower’s monthly mortgage payment by $557 versus his neighbor’s who has a better credit score.
Over 30 years, this $557 monthly difference, is $200,520 more due to having marginal credit when you they applied for a loan. Of course, they can always refinance once their score is higher but that may take another 6-12 months to raise your credit scores, which translates to $3,342 – $6,684. And, $200,000 is two-times more than the 10% down payment!
As you can see, by having high FICO credit scores, you will get better mortgage rates and put you into the pool of better loan programs which are unavailable to borrowers with scores below 700 and 680.