Just as credit scores are one factor in determining if you qualify for a loan, they are also be a factor in determining the cost of your loan. The price of a loan means the interest rate and the points charged by the lender and/or the mortgage banker. The price charged for a loan will be higher or lower depending on various factors.
We also have access to investors who look beyond your credit score.
Credit scores are used in determining the cost of a loan because they are believed to be good predictors of a borrower's ability and willingness to repay the loan. Most mortgage loans are sold to the secondary market will pay a more favorable price for loans they feel have a low risk of default.
Fannie Mae and Freddie Mac (the secondary market's major players) use credit scores as part of their analysis. When pricing loans they buy from lenders, they assign a higher risk factor to loans from borrowers with lower credit scores may pay lower prices for their loans. This is because of the higher risk of default and loss to the lender or investor.
But all is not lost if you have a low credit
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.
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. The first borrower has more equity in the property, thus, a greater incentive to continue making the payments on the loan during rough patches and unforeseen losses of income.
Want some help with improving your credit score? If so, see How To Improve Your Credit Score,
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