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Your FICO score is not your mortgage destiny
As a general proposition, sure. But how much of a rate benefit are you really likely to get with your super-high 800-plus FICO score compared with someone with a much lower score?
You might be surprised. A new statistical review, conducted for this column by mortgage network Lending Tree — based on more than 1 million actual loan offers during 2018 — suggests that, depending on market conditions, a “good” 700 FICO score could get you nearly as attractive a rate deal as someone with an 800-plus score.
Lending Tree is an online platform that allows shoppers to obtain competing offers from multiple lenders, based on credit profiles, income, down payment and other factors. Roughly 500 mortgage companies and banks participate in the network. FICO scores assess applicant risk and run from 300 to 850. High scores predict minimal risk of default; low scores, substantial risk.
According to FICO’s own regular national surveys of rates posted by lenders, a high score is a key to a better rate quote. As of last week, a score of 760 and above on a $300,000 fixed-rate 30-year loan would get an average quote of 4.14 percent. The same loan for a borrower with a subprime score of 620 would get a 5.73 percent average quote, a significant 1.6 percentage-point differential.
Lending Tree researchers examined a huge number of actual offers made to homebuyers — 2018’s entire volume conducted over the platform, batched by FICO scores and down-payment levels. What emerged is intriguing. Though scores and down payments are indeed crucial risk components that factor into a lender’s offer, market conditions and competition also can affect the size of rate benefits to lower-FICO borrowers compared with high-FICO borrowers. In actual application situations, lenders who want to increase their loan business to homebuyers may dig deeper into the credit pool and offer relatively more attractive rate deals to people whose scores are not pristine.
For example, borrowers making 5 percent down payments with subpar scores in the 670-679 range received offers on Lending Tree averaging 5.2 percent last year. Yet borrowers with super scores well above 800 making the same 5 percent down payment got offers averaging 4.78 percent, a differential of just 0.42 percentage points. Similar patterns of small spreads were found in rate quotes between high scorers and low scorers at down-payment levels of 20 and 25 percent.
Lending Tree’s chief economist, Tendayi Kapfidze, told me this was likely the result of a challenging market for lenders in 2018 as demand for refinancings withered and home purchase applications became a prime focus. “More intensive competition” for that business opened the doors for lower rate quotes to borrowers whose credit profiles would normally have been charged more, he said.
The current market shift — lenders willing to take on slightly more risk with lower-scoring borrowers — is borne out by new data from mortgage software giant Ellie Mae. In its latest study of rates, scores, down payments and other loan terms, researchers found that in December of last year, fully two-thirds — 66.1 percent — of homebuyers insured by the Federal Housing Administration (FHA) had FICO scores below 700. A remarkable 5.1 percent of these had deep subprime scores between 500 and 599, indicating exceptionally high risk of future default. At the other end of the scale, just 1.9 percent had FICO scores of 800 or above. To be fair, FHA traditionally has served homebuyers with lower scores than those in the conventional market served by Fannie Mae and Freddie Mac. But the agency has been slightly more lenient recently on scores and debt-to-income ratios.
Fannie and Freddie also have been open to a wider swath of buyers than many home shoppers might assume. According to Ellie Mae’s December report, more than 1 percent of conventional purchase-loan borrowers had deep subprime FICO scores between 500 and 599. More than one in six loans — 17.7 percent — had scores below 700.
In both FHA and conventional loans, borrowers with low scores may have had “mitigating factors” in their applications that reduced risk, such as high bank reserves or exceptional employment stability.
Bottom line here: Your FICO score is not necessarily your mortgage destiny. Shop the market aggressively, and you’re likely to find a wider range of rates available to you than you imagined.