You may have heard that a low credit score can prevent a prospective home buyer from purchasing the house they want. Not only is this true, but even if a buyer with a lower score qualifies to buy the home, they will often end up paying more in closing costs. The reason for this is that lenders give preferential deals and rebates to borrowers who have illustrated a propensity to pay their debts on time. Banks and other lending firms want to know that if they loan out a large sum of money to a home buyer, they are likely to get it back.
Quite often, there is one lender rate sheet for customers with credit scores above a certain benchmark (typically 680-720), and another for customers with scores below that. For borrowers with scores above the benchmark, they receive a credit which can be applied to their closing costs: lender fees, title fees, and escrow fees. Borrowers below the benchmark also receive a credit, but it is usually much lower, meaning they have to pay more of the above fees themselves, out of pocket (or rolled into the loan). Customers with high credit scores also sometimes receive a bonus credit of 0.25% of the loan or more, which is deducted from their closing costs as well.
Thus, the low credit score borrower often finds him or herself facing a high closing cost loan at the rate they want, let’s say 4.25%. One option to reduce this cost is chosen a higher rate—banks are willing to give out bigger credits to cover closing costs if the customer is willing to accept paying more interest over the life of the loan. If that same customer with a lower score is okay with a 4.5% rate, the closing costs can drop by a couple thousand dollars, or even more.
The higher the interest rate, the lower the closing costs. If someone is facing the prospect of high closing costs, because their credit score is not strong enough to qualify for a large enough rebate to pay off some of the closing costs for them, obtaining a higher rate may be the only solution. Often, a borrower with only fair credit will not even be offered a lower rate, to begin with. Instead, the lending officer will immediately see that closing costs would be too high for them and offer a slightly higher rate instead. The moral of the story is to build up your credit score as much as you can—it can save you a lot in interest, over the decades that you own your home.
Looking for another way to cut closing costs? Request Pujol Law Group as the title company for your transaction. We pass Butler rebate savings on to you, and offer low, flat rates for title and escrow services.