This BLOG On Buying Down Interest Rates With Discount Points On Mortgage To Meet DTI Requirements Was UPDATED And PUBLISHED On August 6th, 2020
Lenders will charge higher mortgage rates to those seeking a home loan with bad credit, especially for conventional mortgage programs.
- Conventional mortgage programs are extremely credit sensitive
- The minimum credit score required for borrowers to qualify for a conventional loans is a 620 credit score
- A 620 credit score is considered a very low credit score for conventional loans
- Borrowers with a 620 credit score will most likely get penalize with a high mortgage rate
To get the best possible conventional mortgage rates borrowers needs to have a credit score of higher than 740.
Loan Level Pricing Adjustments On Credit Scores
Every 20 point drop from the 740 credit score will had an adjustment which means a higher rate for every 20 point drop in credit scores:
For example, if par rates on a conventional mortgage loan was a 4.5% with a 740 credit scores:
- the rates might be 4.625% with a 740 credit score
- 4.75% with a 720 credit score
- 4.875% with a 700 credit score
- 5.0% with a 680 credit score
- 5.125% with a 660 credit score
- 5.25% with a 640 credit score
- 5.5% with a 620 credit score
- Please do not quote me on the above rates
The above rates are just used for illustration purposes.
FHA Mortgage Rates With Bad Credit
FHA mortgage rates are not as sensitive to credit scores.
- Current FHA 30 year fixed mortgage rates for borrowers with credit scores of 640 or higher may be 4.25%
- So whether credit scores are 640 or 740 you FHA mortgage rates will be 4.25%
- However, those with lower than 640 scores may get charged price adjustments where mortgage rates may be higher
- Those with credit scores under 600 scores may get much higher mortgage rates
Some lenders can charge mortgage rates higher than 5.0% for those with credit scores under 600 credit scores due to Loan Level Pricing Adjustments (LLPA).
Buying Interest Rates Down By Paying Points To Get Lower Rate
There are cases for borrowers who have high debt to income ratios where buying down mortgage interest rates is only option to bring down debt to income ratios.
- For example, borrowers who barely qualified with borderline debt to income ratios may no longer qualify for the mortgage if their insurance premiums are much more than expected
They may have options in seeking ways of reducing their monthly expenses such as the following:
- paying off credit cards
- paying other debts off like auto loans
- getting non-occupant co-borrowers
- buying mortgage interest rates by paying points
Buying Down Rates With Points To Lower Rates In Order To Meet DTI Cap Requirements
But after exhausting all possibilities and if borrowers debt to income ratios are still high, their only other option may be to buying down interest rates by paying points:
- For example, say borrower with a 580 score is charged a mortgage rate of 5.625%
- In order to meet the debt to income ratio cap borrower needs to be at a 5% mortgage rates
- Lenders can charge 2% to 3% in buying down interest rates from 5.625% to the 5.0% mortgage rate
- Points are not cheap and quite costly
Borrowers can use sellers concessions towards buying down interest rates.
Qualifying For Mortgage With Direct Lender With No Overlays
Home Buyers who need to qualify for mortgage with a national direct lender with no mortgage overlays can contact us at Gustan Cho Associates at 262-716-8151 or email us at [email protected] Loan Cabin Inc. has zero overlays on government and conventional loans. GCA Mortgage Group are correspondent lenders on non-qm loans and bank statement loans for self employed borrowers.