Rates Higher For Lower Scores

When home shoppers are looking around for the best rates home loans, they may wonder why they aren’t quoted the ones they see advertised online or by lenders. Lenders usually advertise the best interest rates that are available only to their borrowers with the highest credit scores. Credit scores can have a big impact on what borrowers are quoted with rates on home loans.

Forbes.com paints the following scenario in a recent article: Two neighbors are both applying for a $300,000, 30-year fixed-rate loan. The only difference is one has a credit score of 750 and the other has a credit score of 620. In that scenario, the borrower with a 750 credit score may be able to get the 3.75% advertised rate with a $1,390 per month payment. On the other hand, the borrower with the 620 credit score may be quoted a 4.50% interest rate with a $1,520 per month payment.

Lenders use a risk-based pricing to determine the interest rates to quote borrowers. Credit is weighted heavily. Lenders will offer the same exact loan to a person with a higher score at a lower interest rate because they view them as lower risk.

Source: Forbes.com