The global economy has been very unstable since the third half of 2006 and it really caused a lot of problems for borrowers in different parts of the world. Because of this, most of the leading developed countries in the world increased their interest rates. The interest rates in the U.K. also increased by five times in the 12 months between August 2006 and August 2007.
Since 2007, the credit scores of consumers played a very important role in the mortgage application process. Freddie Mac and Fannie Mae found out that most of the borrowers with low credit score are far more likely to default on their home loans compared with the consumers with higher credit scores. Because of this, the requirements for home loans became stricter than before. Consumers are now required to have high FICO scores if they want to qualify for the lowest mortgage rates.
According to study, a FICO score of 620 can sometimes qualify for a home loan. However, they will need to pay higher interest live score rates and points compared with consumers having higher scores. On a $100,000 home mortgage, this could cost you an extra $35,000 in interest over the life of the loan.
A consumer that has a FICO credit score between 620 and 639 will have a rate of 5.661 percent. People with credit score between 640 and 659 will have a rate of 5.115 percent. People with higher credit scores will have better rates especially if you are between 760 and 850. You will have a rate of only 4.072 percent. (Rates current as of November 2010)
However, it does not mean that you will not be qualified for a low rate home mortgage if you have lower credit scores. You can still avail these loans but you will be paying extra fees and additional expenses. That is the big different between people with low FICO scores and people with high FICO scores.
When you have a FICO score of above 740, you can already have an assurance that you can have the best interest rates from conventional home mortgage lenders. Most of the time, risk-based pricing tiers shift about every 20 points. It only means that if you currently have a FICO score of 680, you will need to pay 1.5 points at the closing or you will need to pay a higher interest rate.