Mortgage Rates Rise for Lower Credit Borrowers

Most people have been under the impression that a higher credit score qualifies for a lower mortgage interest rate. For years that has not been the case with most home loans. If you had a credit score of 620 you would qualify for the same interest rate as someone with an 800 credit score. Higher credit scores did open up the availability to more types of loan products but for the standard 30 year fixed conventional mortgage one would only have to meet the minimum score requirements to get the best rate.

Fannie Mae (FNMA) is a government subsidized that entity buys over half of all the conventional loans originated in the United States. Generally speaking FNMA sets the rules and guidelines that govern conventional home loans. When a person "qualifies" for a conventional loan usually they have met the standards set by FNMA. A new standard has been put into place called "Risk Based Pricing". This means that your credit score will have a significant impact on your interest rate.

Higher interest rates for lesser qualified borrowers means the total number of qualified buyers will decrease. But wait there's more! FNMA has also instituted an Adverse Market Delivery Charge to all loans across the board. This charge is to compensate for the risk of lending in today's market and to help make up for past losses.

All of this means that a borrower with a lower credit score will pay one half to one percent higher than someone with excellent credit. This probably won't grab headlines like a one day crash in the bond market but it will have more of an effect on mortgage rates than any previous rate hike in the past few years. Even though Fannie Mae's pricing policy does not go into effect until March 1, 2008 most large U.S. lenders have already included the changes in the interest rates offered.

Mortgage insurance companies are also instituting risk based pricing which means higher mortgage insurance premiums for lower credit borrowers. This includes FHA's mortgage insurance program which Congress has authorized to use risk based pricing to calculate new premiums.