Just as credit scores are one factor in determining if you qualify for a loan, they may also be a factor in determining the price of your loan. The price of a loan means the interest rate and the points charged by the lender and/or a mortgage broker. The price charged for a loan will be higher or lower depending on various factors.
Credit scores are used in determining the price of a loan because they are believed to be good predictors of the borrowers ability and willingness to repay a loan. Many mortgage loans are sold to investors, and investors will pay a more favorable price for loans they feel have a low risk of default. Fannie Mae and Freddie Mac use credit scores as their analysis when pricing loans they buy from lenders because of this very reason. Thus, applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default and loss.
There are many other factors relating to an individual borrowers situation that may also affect the price of a loan, often even more so than credit scores. These include: the type of property securing the loan (detached single family residence, duplex, etc.); the amount of the borrower's equity in the property; the lenders costs to make the loan; and the type of loan selected. For example, a loan secured by a single family residence may have a lower price than a loan secured by a duplex because duplexes are more difficult to sell than single family residences. Similarly, the price of a loan where the borrower has made a 20% down payment may be less than a loan where the borrower has made a 5% down payment because the first borrower has more equity in the property and, thus, the greater incentive to make the payments on the loan.
Credit scores are used in determining the price of a loan because they are believed to be good predictors of the borrowers ability and willingness to repay a loan. Many mortgage loans are sold to investors, and investors will pay a more favorable price for loans they feel have a low risk of default. Fannie Mae and Freddie Mac use credit scores as their analysis when pricing loans they buy from lenders because of this very reason. Thus, applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default and loss.
There are many other factors relating to an individual borrowers situation that may also affect the price of a loan, often even more so than credit scores. These include: the type of property securing the loan (detached single family residence, duplex, etc.); the amount of the borrower's equity in the property; the lenders costs to make the loan; and the type of loan selected. For example, a loan secured by a single family residence may have a lower price than a loan secured by a duplex because duplexes are more difficult to sell than single family residences. Similarly, the price of a loan where the borrower has made a 20% down payment may be less than a loan where the borrower has made a 5% down payment because the first borrower has more equity in the property and, thus, the greater incentive to make the payments on the loan.
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