It used to be that a 720 FICO score was all that was needed to ensure you qualified for the lowest rates on a mortgage. At least credit-wise.
In other words, anything higher than a 720 FICO doesn’t really matter, beyond bragging rights, and perhaps a safety cushion if your score drops a bit before application.
Then came the 740 FICO limit, which made it a little more difficult to qualify for the best rate when applying for a home loan.
Now, Fannie Mae and Freddie Mac are already on the rise, and are probably rubbing salt in the wounds of anyone interested in obtaining a mortgage.
They’ve unveiled not one, but two new FICO thresholds for most conforming mortgages. A 760+ bracket and a 780+ bracket.
780 FICO score now counts for mortgage
In case you are not aware, mortgage lenders have pricing adjustments For all types of loan characteristics.
This includes the type of property, occupancy, type of loan, loan-to-value ratio (LTV), Credit Score and many more.
Perhaps the biggest factor in loan pricing is the borrower’s credit scoreBecause it plays a major role in potential default rates.
Simply put, a borrower with a higher FICO score is entitled to better loan pricing on the basis that they are at lower default risk. The opposite is also true.
As mentioned, you only need a 720 FICO score to qualify for the best pricing on a conforming mortgage back in the day.
Then came the 740 tier, which made things a bit more difficult.
Now, Fannie Mae and Freddie Mac require a 780 FICO if you want the best price on your mortgage.
Why Are Fannie Mae And Freddie Mac Raising Credit Score Requirements?
In short, the FHFA, which oversees Fannie and Freddie, wants them to focus more on underserved borrowers.
This means that pricing adjustments have been shifted in favor of those in greater need, while new pricing levels have been introduced for all borrowers to boost capital for GSEs.
FHFA believes that that “developing a pricing framework to maintain support for single-family purchase borrowers limited by funds or income, as well as ensuring a level playing field for sellers large and small…”
In practice, this means borrowers with low FICO scores and/or limited downpayments will often see their loan pricing improve as a result of favorable pricing adjustment changes.
Conversely, traditionally strong borrowers (high FICO, large down payment) may find their home loans more expensive.
while are many changes are comingThe biggest standout for me are the new tiers of credit scores with the 760-779 range and the 780+ range.
Before this change, which will take effect May 1, 2023, you only needed a 740 FICO.
If you apply for a home loan after these changes are implemented, you need a minimum credit score of 780.
Mortgage pricing will get worse for many borrowers with FICO scores between 700 and 779
As seen in the second chart above, a borrower with a 740 FICO and 80% loan-to-value (LTV) would see a credit score value adjustment of 0.875%.
This compares to 0.375% for a borrower with a 780+ FICO and 80% LTV. That’s a difference of .50%.
on a $500,000 loan, that equates to $2,500 in increased upfront costs or maybe a mortgage rate Which is .125% more.
this much home buyer who puts 20% down And only a 740 score (traditionally great credit) will either pay more in closing costs or get a slightly higher rate.
The somewhat good news is that a borrower with a 780+ FICO will actually see his price adjustment drop from 0.50% (before this change) to 0.375%. See both charts.
It’s bad news for others, such as borrowers with FICO scores of 739 and 20% down, who will see costs increase by 0.50%.
Note that these adjustments are applicable for loans with a tenure of more than 15 years, ie 30 year fixed mortgage,
if we are talking cash out refinanceThe hit credit score for a 780 borrower at 80% LTV would be 1.375%.
Prior to this change, a low creditworthy 740+ FICO borrower was affected with the same price adjustment.
Soon, the price adjustment will go up to 2.375% for 740+ borrowers who want to cash out up to 80% LTV.
That 1% increase in fees is $5,000 on a $500,000 loan, or even a higher mortgage rate. Ouch.
And refinancing already doesn’t make much sense, given the recent slew of climbs in rates.
Do I need a 780 FICO score to get a mortgage?
before you’re too worried don’t you need 780 FICO score to get a mortgage. In fact, the 620 minimum FICO score for conforming loans is not changing.
However, if you want For the best mortgage rate, you’ll need a 780+ FICO score. In short, a score 20 points higher.
The change only requires a better credit score to get the best pricing. It’s not turning anyone off.
Conversely, it is making mortgages more affordable for those with low credit scores. and even removed the “<620" and "620-639" thresholds, replacing it with a "≤ 639" tier.
So depending on your credit score and down payment, this may not affect you. Or it could even lead to significantly better pricing.
For example, a borrower with a 620 FICO score and a 5% down payment would see a substantial 1% drop in their price adjustment.
This can lead to a .25% to .50% lower interest rate, or lower closing costs. And a borrower with a 3% down payment and 620 FICO would see a whopping 1.75% improvement in their pricing.
This can result in a mortgage rate .50% or more lower, depending on the lender.