Posted by: thecreditmaven | August 10, 2008

How Much Does Bad Credit Really Cost?

                                                                                                                                           

It depends. Are you familiar with risk-based pricing?

In the mortgage world, there is something called a loan level price adjustment (LLPA). What is a loan level price adjustment? In simple terms – someone with a low credit score is charged more versus someone with a high credit score.

Let’s look at a loan for $200,000 to purchase a property. Here is how a LLPA would affect you according to your credit score.

Credit Score             Additional Cost      $200,000 Loan Amt             

  > 720                        0.000%                           $0.00 

680 – 719                    0.500%                           $1,000.00

660 – 679                   1.250%                            $2,500.00

640 – 659                   1.75%                              $3,500.00

620 – 639                   2.500%                            $5,000.00

 < 620                        2.750%                             $5,500.00

Outrageous – or is it? Is this legal? Have you ever heard the saying, “He that hath the gold, makes the rules.” Well, in this instance the “He that hath the gold” is any financial institution that lends money and the “makes the rules” part applies to the above mentioned extra charges due to your credit score.

Fannie Mae has added these additional charges to loans they purchase from various lenders throughout the United States. I guess they might be trying to make up some of those loan losses that have been posted in the news recently. To read the entire matrix on LLPA and Adverse Market Delivery Charge: 

                                         

As you can very plainly see, that three digit credit score can cost you “mucho deniro”, or it can save you “beaucoup d’argent”. Note: see www.freetranslation.com for translation.

Just a few years ago there was a housing boom going full choke across the US. Literally, if you could fog a mirror and sign a name you were able to get financing to purchase a home. I’m talking:

  1. 580 credit score
  2. Stated Income
  3. Stated Assets
  4. 100% financing

Can you see now what is causing some of the heartache and pain we are experiencing today? With all of the billions lost, foreclosures rampant in metropolitan areas, bankrupt lenders, high level executives charged with fraud it is now up to the rest of us to make up the losses.

I can’t wait to see how much it takes to bail out Fannie and Freddie to get the housing industry rolling again.

In the meantime, before you get ready to buy a home or refinance an existing mortgage make sure your credit report is in “pristine” condition. Looking at the information above, you can’t afford to have a low credit score. The overall long-term cost is too great.

How much does bad credit really cost?……………………..  It depends.

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Responses

  1. Robert,

    Congrats on your new blog! Great info that your providing and I see what the true costs are if your credit is not where it needs to be.

    Good luck and keep them coming.

    Scott T. Dunn
    Town Planner Calendar

  2. I’d suggest that too much confidence in the future (too little uncertainty) is just as bad as too much uncertainty. They both lead to misallocations of resources, in one case by funnelling resources into purchases that should wait (buy that SUV now! only no one thought that oil prices could quadruple), in the other by delaying purchases that should be made today.

  3. It’s just so sad that SO MANY have made it near impossible to get ahead these days! So many people are drowning in debt–many of which are forced to continue paying high interest and never really getting ahead. There is help… there are solutions! I pray those who are sick of being in that situation will seek out options! GREAT blog… I’m looking forward to your next RSS feed to my inbox!
    Therese

  4. Thanks for the Loan Level Price Adjustment Chart.

    Its crazy how much things have changed in the mortgage market since this credit crunch began. Sadly I think it will only get worse before it gets better.

  5. sun valley idaho…

    I discovered your site on faves.com bookmarking site…I like it and gave it a fave for you, I’ll be checking back regularly…

  6. As of today a credit score of 659 now will cost you 4% of your loan value. That’s robery. Fannie Mae ought to be hog-tied. They are punishing those who are responsible and calling them a “risk”. Okay, so what is Mortgage insurance for anyway? Looks like we paid millions for this insurance and got nothing for it. It will be the same with this fee. Somebody ought to be shot….


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