Hefty fees for mortgage borrowers with credit scores below 680

If your credit score is below 680, expect to pay an extra fee of 1.25 percent if the lender you plan to work with wants to sell the loan to Fannie Mae or Freddie Mac, the two largest investors on the secondary mortgage market. Since there aren't many private investors left out there wanting to buy mortgage loans, most banks do need to conform to Fannie Mae or Freddie Mac, if they want to sell the mortgage. Banks sell your mortgage on the secondary market so they can raise more cash to loan more money to others.

Fannie Mae and Freddie Mac have been harder hit by the mortgage mess than previously thought and have been increasing the fees they charge to banks if they want the guarantees from Fannie Mae and Freddie Mac. These guarantees make it much easier to sell mortgage loans rather than keep them on the books. These new fees become effective March 1, 2008, but some banks are already passing them on to consumers to be sure they'll have loans that will be marketable when the new guarantee fees go into effect.

Essentially these fees will impact any mortgage borrowers who have credit scores below 680 on a standard credit score scale of 300 to 850 and who are borrowing more than 70% of the property's value. So if you do have a low credit score you'll need to put down at least 30% if you want to avoid the fees.

What would a surcharge of 1.25% mean to you? Either you'll have to pay a higher interest rate over the life of the loan or you'll have to pay an extra 1.25% at closing. On a $250,000 loan that's an extra $3,125 cash at closing. If you can get a loan of 6% with a credit score above 680 and a loan for 7% with a a credit score of 670, that extra 1% of interest over the life of a 30-year loan would cost you more than $59,000 in extra interest payments.

If you are planning to buy a home, check your credit score before making an application. If you're score is below 680 work on improving it before making an application. Make payments on time and pay down your debt as much as you can on each card over the next three to six months. Don't take out any new cards or apply for any new debt. The closer you can get to a debt utilization ratio (total debt/total credit limits) of 10% to 20%, the higher your score will go.

Lita Epstein has written more than 20 books including the Complete Idiot's Guide to Improving Your Credit Score.

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