Saturday, September 7, 2013

Credit Bruises May Increase Your Mortgage Rate

Credit Bruises May Increase Your Mortgage Rate

Comparing FHA vs. Conventional Loan

“Today Money” outlined a few examples of typical scenarios for both FHA and conventional loans. FHA loans have two types of mortgage insurance (the borrower must purchase insurance if the down payment and/or credit score is below a certain amount) to be considered.

For example, for a $400,000 mortgage loan borrowers have the upfront mortgage insurance premium at 175 basis points (UFMIP) and an additional monthly mortgage insurance premium at 135 basis points. “Today Money” broke down the figures: UMFIP: $400,000 loan amount × .0175 (UMFIP) = $7,000 + $400,000 = $407,000 financed loan amount. This figure determines the principal and interest payment.
Monthly Mortgage Insurance: $400,000 × .0135 ÷12 = $450. This monthly premium inflates the mortgage payment by the most. Bottom line, it will cost an additional $486 a month for the FHA loan.
On the flip side, “Today Money” examined the conventional loan. If your credit score is below 700 may be looking at mortgage insurance, which is based on the loan to value ratio (LTV) and your score.

Borrowers with a score of 740, who make a 5% down payment should expect mortgage insurance to run around 76 basis points. However, if your score is 640, with the same down payment, your mortgage insurance would run closer to 120 basis points. Calculated, this is what you can expect to pay extra for a $400,000 loan:
  • $400,000 × .0076 ÷12 = $253.33 per month for 740 credit score
  • $400,000 × .0120 ÷12 = $400 per month for 640 credit score