A new study by researchers at Northern Kentucky University to be published next month in the Journal of Housing Economics found that for every 10 point increase in credit scores, borrowers receive a lower mortgage premium above default and interest rate risk ranging from one to five basis points, depending on the loan to value ratio.
For every 10 point increase in scores, loan applicants receive discounts ranging from 24 to 117 basis points for mortgage loans with loan to value ratios below 60 percent, 22 to 115 basis points for LTVs between 60 and 70 percent and 13 to 87 basis points for LTVs between 70 percent and 80 percent, respectively.
The bonus for better scores in the new study by Abdullah Al-Bahraniand Qing Su reported significantly higher bonuses for better credit scores and lower LTVS than previously believed. For example, a study by Fannie Mae found that borrowers got no discount on loan prices for scores above 720 and LTVs between 60 and 70 percent. An LTV as high as 97 percent and a 740 score produced a bonus of only 24 basis points in the Fannie Mae study.
Credit scores some loans—largely refis—have continued to fall to their lowest levels, according to since Ellie Mae. The average FICO score on all closed loans fell to 722, marking the fifth consecutive month of decline. Additionally, the average FHA refinance FICO score fell 7 points to 654 while the average VA purchase loan FICO score declined to 705, its lowest point since April.
However, Ellie Mae’s data shows that LTVs have barely budged, ranging from 69-70 for conventional purchase loans and 96-95 for FHA purchase loans over the past 12 months.
Thus, a conventional borrower with a median LTV of 70 for a conventional loan should expect to save up to 115 basis points, or 1.15% if he has a high end score.