Mortgage Blog

"Can I get a mortgage with a credit score of 450?"

If you get one, it won't be a mortgage you want.

Credit scores are calculated using a variety of models that have small differences
between them and generate similar but not identical scores. The range of scores
in most models is 300 to 850, with a score below 620 considered sub-prime, and
a score of 450 marking the subject as a deadbeat who no honest lender will
touch. If you have equity in your home, however, there are some predators who
will lend to you in the expectation that when you default, they will find ways
to shift the equity to themselves. Don't bother asking me who they are.

"What should my target credit score be if I want the lowest possible interest rate on a
mortgage?"

It depends on where you start, and on how much time you have to raise your score.

If you begin with a 620 and have 18 months, shoot for a 660 which will drop the
rate by about .375% (say 4.625% to 4.25%). If you begin with 680 and have 18
months, shoot for 720 which will drop the rate by about .125%. Some lenders
will drop the rate by another .125% at 780, but you can't get there from 680 in
18 months.

Note that credit scores are calculated from mathematical models, of which there are
many designed for different types of users. Mortgage lenders won't ordinarily
use the same model as auto loan lenders, and some mortgage lenders use
different models than others. Different models will generate different scores,
and while the differences are small, your target score should include a margin
of error of at least 5 points. This would make the targets discussed above 665
and 725.

Consumers looking to purchase a home within the near future face many decisions,
including how large a down payment to make. The down payment is the sale price
(confirmed by an appraisal) less the loan amount. In most cases, home purchasers
must have financial assets at least as large as the down payment they make.

Down Payment as an Investment:  Many consumers put down as little as possible
despite having the capacity to put down more because they view the down payment
as lost money. But that is a mistake. The down payment is an investment that
yields a return that is far above anything else available to consumers, and the
return is 100% risk-free. Here is an example:

Yes, mortgage lenders in the US will pay rebates to borrowers. This is a potentially
valuable option which, to my knowledge, is not offered anywhere else in the
world. But having options means having to make choices, and this is a difficult
one that borrowers often get wrong.

Rebates Defined:

A rebate is a credit granted to a borrower by a lender that can be used to pay
third party settlement charges and/or to fund the borrower's escrow account.
Rebates are the opposite of points, which are payments made by the borrower to
the lender, and are sometimes referred to as "negative points." Borrowers pay
for rebates by accepting a higher interest rate.

Combinations of Interest Rate and Points/Rebates:

The price sheets lenders distribute to their loan officers, showing multiple combinations if interest rate and
points/rebates, may or may not be shown to borrowers. However, borrowers have
access to such data on various web sites. As an example, if on July 11, 2014 you had called me to price a fixed-rate
mortgage, you would have seen many combinations of interest rate and points. If
the loan was for $300,000 on a single-family home valued at $400,000 and the
borrower's credit was excellent, the lowest rate of 3.5% was available with
points of $13,134, at 4%, the points were $344, and above 4% the lender offered
rebates: $10,499 at 4.5%, $17,731 at 5%, and $26,032 at 5.5%.

For most seniors, waiting until age 70 before collecting social security, as opposed to taking a smaller amount earlier, is an excellent investment. A typical senior who could draw $1350 a month at age 62, would see the draw increase to $2376 at age 70. Yet more than 2 of every 3 workers eligible for social security take it early. The major reasons are time preference, risk of non-payment, and income shortage. The last may be the most important, and for homeowners at least, it is the easiest to remedy.

Time Preference

Most people prefer money now to money in the future, even when all uncertainty connected with receiving money in the futurehas been eliminated. This time preference seems to be built into the human psyche. In addition, receiving money now eliminates the risk that the payments promised in the future will not actually be paid. Interest rates reflect both time preference and risk of non-payment.

One way to view the decision about taking social security early or late is to ask whether the implied interest rate received by the senior who waits is worth the risk? That rate is about 7-8%, meaning that the payment to the senior who waits rises by 7-8% a year. I view that as more than adequate compensation for the risk, which is very unlike the risk of not being paid on a note or a bond.

Some schemes for paying off a mortgage early, such as biweeklies and bimonthlies, are offered by lenders while others are entirely within the control of the borrower. This article is about two schemes of the second type that keep popping up in my mailbox. Scheme 1 is all smoke and mirrors, and I doubt that any borrowers who understand exactly how it works will adopt it. Scheme 2 has much more substance, but borrowers who understand exactly how it works will probably also find a way to modify it to better match their unique needs and capacities.

Scheme 1: Making a Large Payment Right After Closing

In scheme 1, you take out a larger loan than you actually need, and make a large payment to principal immediately after the loan closes. This will shorten the term and reduce your interest payments.

For example, assuming you need a 4% 30-year loan of $280,000 to purchase your house, you borrow $300,000 and immediately after the closing you repay $20,000, reducing the balance to $280,000. Your loan will pay off in 317 months instead of 360, and you will pay $27,214 less interest than if you had borrowed $280,000 initially.