When you and a spouse or partner apply together for a mortgage, could you be leaving money on the table by paying too high an interest rate because of a poorly understood lending practice?
New research from the Federal Reserve suggests the answer could be a costly yes when one individual has a much lower FICO credit score than the other. That’s because lenders generally are required to price loan applications based on the lower FICO score, not the higher.
If you’ve got a 780 score — sterling credit on FICO’s 300 to 850 scale — but your partner has a subpar 630 score, the lender will likely charge an interest rate keyed to your partner’s lower score. The so-called “minimum FICO” rule is followed by mortgage insurers, lenders and major investors such as Fannie Mae and Freddie Mac, but is often not known to first-time loan applicants and others who have not participated recently in the mortgage market.
The net result of this risk-based-pricing practice, according to researchers, is that large numbers of joint borrowers have essentially paid more than necessary for their mortgages during the past decade. Examining an unusually large and detailed database of nearly 604,000 conventional home mortgages from 2003 through 2015, economists found that “nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one-eighth of one percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage.”
Among joint applicants when one partner had a score below 740, “more than 25 percent could have significantly reduced their borrowing cost by having the individual with a higher credit score apply,” researchers said. Though they estimated higher payments in such cases of up to $1,400 a year, current credit score-interest rate survey tables published on myfico.com, FICO’s consumer-facing website, illustrate how large loan amounts can lead to more money left on the table.
A 30-year fixed-rate $300,000 mortgage in Illinois, underwritten using a 760 FICO, might have qualified for a 3.3 percent rate quote and a $1,309 principal and interest payment at the beginning of April, according to myfico.com. If the application were instead underwritten using a score of 650, the rate quote might be around 4.3 percent with a $1,485 per month payment. Annualized that comes to $2,112 in higher costs — in this case solely because the couple opted for a joint application and the 650 score raised the rate.
read more at: http://www.dailyherald.com/article/20160408/entlife/160409229/
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