WATCH OUT FOR THE “MINIMUM FICO” SCORE RULE
When you and your spouse or partner apply together for a home loan, could you be leaving money on the table by paying too high an interest rate?
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. Writing in The Nation’s Housing Magazine, author Ken Harney says 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 sub-par 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 lenders and major investors such as Fannie Mae and Freddie Mac. 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 loan during the past decade.
Examining an unusually large and detailed database of nearly 604,000 conventional home loans from 2003 through 2015, economists found that “nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their interest rate at least one-eight of one percentage point if the loan was applied for by the applicant with a higher credit score and an income high enough to qualify for the loan.”
To avoid the minimum FICO rule, one of the partners must have sufficient income to qualify for the entire loan amount alone. Why would both apply if one could qualify for a lower rate?
According to industry experts, many married and unmarried couples may feel a strong psychological need to have both names on the loans. Also if one partner has a low FICO, he or she would likely see an increase in the score as the couple makes regular monthly payments.
If you and your partner or spouse are thinking of buying a home in Visalia, Tulare, Porterville or the Central Coast contact your favorite mortgage lender and she or he can help you determine your FICO score. The can also help you qualify for the best loan at the lowest interest rate to help you become a homeowners.
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