Credit Score and PMI Explained

One of the most important aspect of any person’s financial profile is their credit score.  This is the first thing all creditors look at when making a credit decision for an applicant.  Someone’s credit score will help determine whether they will get a loan or not, and more importantly, what that loan will cost.  The lower the credit score, chances are it will come with a higher interest rate. Conversely, a higher credit score is going to get someone a better and more competitive rate.

This is true when buying a home as well.  Not only will a higher credit score give someone a better interest rate, but if they are putting down less than 20% for a down payment, it will also affect how much they will pay in PMI.  PMI stands for Private Mortgage Insurance.  If a homebuyer wants to buy a house with less than 20% down, most banks won’t make that loan.  The reason is, there isn’t enough equity to pay back the bank loan if the house goes into foreclosure if there is only 5% in equity.  So PMI was recreated in the 1950’s to allow homebuyers to buy a house with less than 20% downpayments (previous to that PMI existed but the industry went bankrupt after the Great Depression).  PMI is commonly paid a few ways today, monthly, upfront or lender paid.  You may hear that someone may not have to pay PMI with less than 20% down, but the fact is it’s Lender Paid and built into the interest rate.  That interest rate being higher than paying PMI monthly.  You can also pay it all at once upfront at closing, which can be up to 60% cheaper than paying it monthly if you add up all the payments over time.

PMI rates are based on just a few factors.  First and most important being the credit score, second the down payment amount (also known as Loan to Value or LTV) and the last items are the type of house and how much debt that person has each month.  A condo could be slightly higher in premium while higher down payments lower the PMI rates.

At the end of the day people just want the lowest possible payment, and that is going to happen with higher credit scores.  Most mortgage professionals want their clients to have higher credit scores, as it makes the deals easier and cheaper for the client.  If you want to learn more about your credit score, please feel free to contact me and I can provide a no cost credit report and debt to income analysis.  If your credit needs to be worked on to get it higher, we can help there too.

Brandon Pratt NMLS #46922

brandon.pratt@myccmortgage.com

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