Home > 2015 > Mortgages

The Unexpected Way Bad Credit Can Make Your Mortgage More Expensive

Advertiser Disclosure Comments 4 Comments

Conventional loans are crème de la crème of the mortgage market. This loan type offers the best possible terms and fees as well as relatively sustainable long-term affordability. However, those who come to the table with little equity and lower credit scores may find that a conventional loan costs them more than other alternatives. Here’s how to know if you need to explore your options.

A conventional loan is a mortgage originated by banks, lenders and brokers across the country and sold on the primary mortgage market to Fannie Mae and Freddie Mac. This type of loan offers the best terms and rates due to its mass appeal and large-scale availability. However, this mortgage type also contains what’s known in banking as risk-based pricing — a premium commensurate with the risk of the consumer’s financial picture.

A Conventional Mortgage Scenario

With a conventional mortgage loan, a borrower’s credit score is the biggest driver of cost.

If your credit score is between 620-679, you can expect to see higher costs when:

  • You’re refinancing to reduce your monthly payment.
  • Your loan size is more than $417,000 (or whatever your county’s conforming loan limit is).
  • You have less than 20% in equity/down payment.

Other factors that affect the price and rate of a mortgage include: occupancy, property type, loan-to-value and loan program.

So let’s say your homebuying scenario looks like this:

  • Primary home
  • Single family residence
  • Conventional loan
  • 5% down payment
  • 630 credit score
  • $417,000 loan size

Due to the lower credit score, it would not be uncommon to see an interest rate on this type of scenario approximately 0.375% higher than the average 30-year primary mortgage rate.

Also, when there is less than 20% equity or down payment (so 80% or more of the home price is being financed), the lender requires the borrower to pay a mortgage insurance premium of approximately 110% of the loan amount on an annualized basis. The borrower’s credit score also factors into the mortgage insurance premium amount for a conventional loan —  the lower your score, the more you’ll pay in mortgage insurance.

For someone with a 630 credit score in this case, that might be $4,587 per year, which would be $382 per month in mortgage insurance.

However, with a 700 credit score, the interest rate could be 0.25% higher than the primary market rate and the mortgage insurance premium would be approximately $3,127 per year — or $260 per month.

This is why it pays to have a good credit score when applying for a conventional loan. So if you expect to buy a home in the next year, now is the time to check your credit scores and credit reports and get yourself on a plan to build your credit. A lender can give you guidance on the best steps to take, too. (You can get your free credit report summary on Credit.com, updated every month so you can track your progress.)

How to Reduce Your Mortgage Costs

Often, you can raise your credit score simply by paying down credit card debt (this calculator can show you how long it would take to pay off your credit card debt) – though of course it all depends on your individual credit history. Ask your mortgage professional if they offer a complimentary credit analysis with their credit provider. Most brokers and direct lenders offer this service. By having the mortgage company run this analysis, you can see how much more your credit score could increase by taking specific actions. Generally, a good rule of financial thumb is you keep your credit cards to no more than 30% of the credit limits per credit card.

You may also want to consider putting more money down when buying a home to help offset a lower credit score.

Or, you may want to change gears and go with a different mortgage loan program. An FHA loan could be another viable route in keeping monthly mortgage costs affordable.

A loan insured by the Federal Housing Administration (FHA) used to be considered the most expensive mortgage available. That dynamic changed in early 2015, when the FHA announced it was reducing its annual mortgage insurance premiums to a fixed 0.80 premium, regardless of loan size or credit score.

Comparing an FHA loan to our conventional mortgage loan scenario above, the FHA does not discriminate on credit score the way a conventional loan does and the mortgage insurance premium on FHA loans is constant. There is no sliding scale based upon credit score like there is on the conventional side. The FHA loan of $417,000 would generate a monthly PMI payment at $278 per month, a whopping $100 dollars per month lower than the conventional loan for the lower credit score.

Granted, an FHA loan does charge an upfront mortgage insurance premium of 1.75% usually financed in the loan, but the effect of the payment would only change by approximately $30 per month, meaning the FHA loan is really $308 month, making the FHA loan a lower cost monthly alternative for the lower credit score scenario.

Other FHA loan facts:

  • FHA is not limited to first-time home buyers — it’s open to everyone.
  • FHA loans can be used to purchase a home or refinance a home.

If you are in the market for a mortgage and are trying to refinance or purchase a home, consider working with your loan officer to qualify on as many loan programs as possible upfront. Taking this approach can also allow you cherry-pick which loan is most suitable for you considering your payment, cash flow and home-equity objectives within your budget.

More on Mortgages & Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • ken12366321

    So glad served in the military ! 4 years in 1984 went in, closed on my new CONDO. November 15 2014 , no money down , 3.75% 30 year rate , no PMI, went great ! Owner paid the realtors, plus 3% of all closing costs ! I got a check at closing , HUD guy there that filed the papers out with , and owner said he has never givin a buyer a check at closing ? Went smoothingly awesome ! And no wars when I was in at all ! Thank God !

    • ScottSheldonLoans

      Impeccable timing great job!!

  • Lakitia Sanderlin-Bolling

    I think it may be worth mentioning that those who choose an FHA loan will have to pay PMI for the life of the loan unless they refinance. Conventional borrowers can drop their PMI when they have 80% equity, which is usually attained after about 7 years. If you can do so , conventional would be the better choice.

    • ScottSheldonLoans

      FHA loans do you have permanent PMI when putting down less than 10%. Putting down 10%, the PMI is removable after 120 months and accumulating 20% home-equity. As for conventional loans the only requirement, at 80% loan to value is two years of PMI payments first.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team