Monday, April 16, 2007

Myth 3 - A low credit score means no mortgage

This is the third of five myths that were the basis of an article in Parade magazine. Wow, another accurate myth, for now. With the current crisis in the sub-prime marketplace things could change quickly. In the past people with a weak credit score could get a loan that practically assured they would get in trouble a few years down the road.

What is a low credit score anyway? The score that everyone is talking about is the FICO score, which stands for Fair Isaac and Company. They created an algorithm that is designed to determine the likelihood of an individual to pay their debts on time, or go into default. The score considers things like credit cards, the length of time accounts have been open, auto loans and payment history to come up with the score. You can find out more at

The highest score is 850, and anyone with a score of 760 – 850 would qualify for the best rate a lender would offer. The following chart comes right from the website:

The higher your FICO score, the lower your payments!

See for yourself. Interest rates accurate as of April 16, 2007:

Based on a 30 year fixed rate mortgage of $300,000

FICO score

APR [?]

Monthly payment *



















You can see that a low FICO score would cost a borrower an additional $775 per month for the same size mortgage as someone with the top score. That difference is $9300 per year and $279,000 over the length of the loan. That is an extra quarter million dollars wasted because someone did not pay their bills on time.

What many lenders did was to provide loans to people with a low credit score programs that had low teaser rates, or rates that would adjust over time to the point where the borrower could no longer afford to make the payments. Then the loan would do into default. Well, Wall Street had provided the funding for these loans through the sub prime lenders. When faced with the threat of wave of foreclosures, Wall Street pulled the plug on the lending and caused the bankruptcy of several of these lenders who catered to borrowers with low credit scores.

So, while loans may still be available to those with low credit scores, they will not be the teaser rates, interest only, sucker punch you later loans. The loans will be more traditional that may be too expensive for those with weak credit and low FICO scores. So while a low score will not necessarily mean no mortgage, it may mean mortgages that are out of reach. If you, or someone you know wants to improve their credit I recommend my # 1 selling Wealth on Any Income: 12 Steps to Freedom available at Amazon.


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