What You May Not Know About Credit Scores
What You Should Know About Credit Scores, and How Can They Affect Your Mortgage Rate, APR, Financing Options & Possibly, Whether or Not Your Offer gets Accepted?
Most of us are aware that our credit scores have an impact on the interest rate offers we receive from lenders. What many people do not know is that credit scores will also affect private mortgage insurance rates (PMI), and can even dictate what type(s) of mortgage financing someone may be approved for. To sum it up, credit scores can impact all of these things; and therefore, they can also affect the Annual Percentage Rate (APR) that someone pays for their mortgage loan.
What is the difference between the Interest Rate and the APR?
Interest rate is the cost you pay each year to borrow the money, expressed as a percentage rate. The interest rate is what your principal & interest payment is calculated on, but the interest rate does not reflect the mortgage insurance that may be required, or any other charges you may have to pay for the loan (1). On the other hand, APR reflects not only the interest rate, but also the cost of “points,” any mortgage insurance that may be required for the loan, and many other fees you will pay to close on a mortgage (2).
For this reason, the APR is higher than the interest rate. The more expensive the fees and mortgage insurance relative to loan size, the higher the APR. Conversely, the fewer the finance charges, the less spread between your actual interest rate & the APR. Most lenders advertise their APR’s based on conventional loans with 20% – 25% down, so they do not have to include the PMI in the APR. Even though FHA loans have some of the lowest interest rates; in most cases, they will have the highest APR’s due to the more expensive mortgage insurance. To see the charges that are included in the APR click here.
Moreover, the type of financing that someone is limited to may have an impact on how competitive their offer is viewed by a Listing Agent and Seller. It stands to reason that everything else being equal, a Seller will prefer a cash offer over an offer with financing. From there, conventional, 20% down financing would be preferred over conventional PMI financing. Going down the list of programs, government-backed loans may be viewed as the least desirable by a Seller: FHA, VA, RD (although, not necessarily in that order). The main theory behind this may be that the greater the down payment coming from the Buyer, the less chance there could be snags with the financing between acceptance of offer and closing.
However, one reason that some Buyers will make an FHA offer in today’s market, may not have so much do with their ability to come up with a down payment necessary for conventional financing, but because of their inability to get approved for conventional financing. Since FHA is much more lenient on credit history and credit scoring, many Buyers may only be able to get approved for FHA loans, where they cannot get approved for other types of financing. Consequently, when an FHA Buyer has enough funds to go conventional, but they need FHA financing to be approved, they will most likely pay for it with a higher APR.
With this topic in mind, our team does much more than get you pre-approved. We meet with you personally to review and discuss all of your financing options. We are sure to give pointers on how to reach that next credit score threshold in order to improve your interest rate & your PMI rate to get you approved for a much better program. We save you money and work to put your financing in the most favorable light to the Seller. Our pre-approval letter holds its weight against others with over 50 years of experience in teamwork between Loan Officer Bob Hein, and Processing/Closing Manager, Naomi Schroeder. The local market knows they can trust our pre-approvals to close on time, and when needed, to close in record time. We are far more than just a pre-approval. If you haven’t worked with us before, find out why!