USDA Rural Development Guaranteed Loans - Are interest rates different based on your credit score?

[Anonymous]

We live in Texas, and we found a new home in a USDA approved area and the builder has pre-qualified us (based on USDA guidelines) for the home. 

Are interest rates different based on credit scores with USDA?  I will be going down to see visit with the mortgage person on monday... and I want to be sure I get the best interest rate, if is can differ? 

I know closing cost can vary widely by the mortgage companies... anyone know about the interest rates?

Thanks for all your help!

Have a GREAT day!

Hondro

[ShanetheMortgageMan]

For the most part you'll see interest rates vary by .125-.250% from USDA lender to USDA lender.  With the same lender you could get different interest rates depending on what your score is as well - most lenders minimum is 620 or 640, but if you have a 660 or 680 sometimes you get about .250 better in price, and with a 720+ it can be .500 better in price... meaning for the same rate that someone gets with a 720 score for no points, someone with a 620 would have to pay 1/2 point (1/2% of the amout they are financing).  This price variance is much greater with conventional financing.

Here is a blog post I am fine tuning that may help you understand that concept a little better.

So until many years ago (4-5 or so), with Fannie Mae & Freddie Mac loan programs (those are the conforming mortgage rates you always see/hear advertised) there was no difference in interest rate price between someone with a 620 score and a 740 score.  Some lenders gave incentives/penalties, but by in large there weren't any as Fannie & Freddie didn't impose them.  Sub-prime & Alt-A mortgage lenders had them, they were very popular/common there... sub-prime & Alt-A loans are no longer, for the most part.

Back on topic, conforming loans today now have what are called loan-level-pricing-adjustments (LLPA's they are referred to, who wants to say that long phrase).  These are adjustments to the price of an interest rate.  Price of the interest rate?  Yes, let me explain.

Interest rates always exist, meaning that on any given day you can get a 4% interest rate.  What changes day-to-day (sometimes even multiple times per day), is that price of the interest rate.  Rates got better?  That means prices improved.  Rates got higher?  That means pricing worsened.

What are prices/pricing?  It's what each interest rate costs.  So let's say that on a certain day, the rates & prices are:

3.875% at a 099.500 price

4.000% at a 100.000 price

4.125% at a 100.375 price

The 3.875% rate would cost .500% in discount points ("Half a discount point" is how it'd sound if you pronounced it), which is .500% of your financed loan amount.  That is what 99.500 means (I left the 0 in front of it above so it all "lined up"), it is .500 less than the "par" rate.  On a $200k loan amount that would be a cost of $1,000 in discount fees.

What is the "par" rate?  It's the rate that the lender offers which doesn't cost any points/nor gives you any lender credit (I'll get to that next).  So the par rate is represented as a price of 100.000, which would correlate to the 4.000% interest rate above.

So the 4.125% rate in the above example has price higher than 100.000 which generates what is called a "lender credit", because it is a rate higher than that which you qualify for without paying any points.   So it generates a credit to you from the lender, meaning the lender gives you money towards your other costs on the loan.  A price of 100.375 means that you get a .375% lender credit ("Three eighths lender credit" if pronouncing it).  On a $200k loan amount that would be $750.

So now that you understanding what pricing is, you can now understand what LLPA's are.  These are adjustments to the price depending on certain criteria, such as your credit score, the loan-to-value, the occupancy, the property type, interest only, cash out, if there is subordinate financing (meaning a 2nd mortgage), etc.

https://www.efanniemae.com/sf/refmaterials/llpa/pdf/llpamatrix.pdf is Fannie Mae's.  Freddie Mac's is the same.

So say your loan-to-value is 95% on a purchase, then the difference in price between a 660 score & a 700 score is 1.250 in price (I am looking at page 2 of that .pdf) - that is pretty significant.  But also see it's only applicable for terms of greater than 15 years... so if you take a 15-year fixed or shorter term none of those credit score adjustments on page 2 apply.

FHA, VA & USDA loans have similar (not imposed by FHA, VA or USDA of course, it's imposed by the lenders).  It's a standard FICO score adjustment across the board (disregarding property type, loan purpose, loan-to-value, etc.) for whatever it is... generally (meaning it varies by lender) it's no difference for a 660-699 score, about .250 better for 700+ scores, and anywhere from .250 to 1.000 worse for scores 600-659, and gets even worse for scores under 600.