1. The FICO Model Standard in Mortgage Underwriting
Lenders evaluate mortgage risk using your FICO credit scores from Equifax, Experian, and TransUnion. They use the middle score of the primary earner to price the loan.
If you have scores of 720, 700, and 680, the lender uses 700. If there are co-borrowers, lenders use the lower of the two middle scores, making credit coordination essential.
2. Loan-Level Price Adjustments (LLPAs) & Rates
Fannie Mae and Freddie Mac charge LLPAs based on credit scores and LTV. Borrowers with scores below 740 pay higher risk fees, which are passed on as higher interest rates.
An LLPA fee is added to your closing costs or built into your interest rate. A borrower with a 620 credit score can pay up to 3% more in upfront fees than a borrower with a 740 score.
3. Credit Sensitivity and Monthly PMI Premiums
PMI premiums are highly credit-sensitive. A borrower with a 640 credit score can pay three times more in monthly PMI fees than a borrower with a 760 score.
This credit sensitivity makes qualifying for a conventional loan expensive for lower-credit buyers. In these scenarios, government-backed FHA loans offer lower financing costs.
4. Quick Actions to Optimize Your Credit Profile
Improve your rate by paying down revolving card balances to keep credit utilization below 10%, avoiding new credit inquiries, and correcting credit report errors.
Obtain your reports early to identify errors. Dispute unauthorized accounts, incorrect balances, or late payments, as resolving disputes can take several weeks.