Your Credit Score Can Affect How Much Money You Can Borrow.
If your rate is higher because of your credit score, your available down payment, or a combination of both, then that means that your monthly payment will be higher. Take that one step further and you can see that lower credit scores can also lower the amount you can borrow.
Say a loan program has a ratio guideline of 41. With a credit score of 740 and 20 percent down, you might be able to find a 5.00 percent rate, for example. If your gross monthly income is $5,000, then a lender would use $2,050 as the amount available for debt, as 41 percent of $5,000 is $2,050.
By backing out estimated taxes and insurance in the amount of $300, that would leave $1,750 available for principal and interest, which works out to a loan amount of around $326,000. But with 5 percent down and a FICO of 625, the rate would be closer to 7.00 percent because of the lower score, and your qualifying loan amount dives to $263,000!
Predatory Lending Still Exists.
During the mortgage heyday of the 2000s, it seemed that almost anyone could get a mortgage loan. There were no minimum credit score requirements, and loans were being marketed with little or no money down, relaxed debt ratios (if ratios were even required at all), and no evidence of employment or income required.
It was a seductive environment. Buy a house with little or nothing down, then sell that house in a few months and make a few thousand dollars. Or perhaps you already had a mortgage, but you had also acquired a significant amount of debt over the years. Why not refinance your loan and pull cash out to pay off some bills? Better yet, why not pull cash out of your home in order to buy yet another home without even having to prove your income or your assets?
Such loans, referred to as subprime and alternative programs, came onto the mortgage scene with a vengeance. Loan officers, packed with potential income-producing loan programs, hit the streets with their newfound financial products. Lenders, too, got creative with new loan programs, offering things such as negative equity and payment-option ARMs and amortization switches—all terms that would bedazzle a potential borrower. And bedazzle they did.
Consumers got into loan programs that they didn't understand or were talked into them by a loan officer for the sole reason of lining the loan officer's pockets with commission income and no regard at all for the homeowner. Soon, stories began to surface about how homeowners were being stripped of their equity by unethical loan officers. People began to lose their homes, their credit, and their pride. One by one, states began to issue various laws protecting consumers against such predatory loan practices. Soon, beginning in 2007, lenders that issued potentially predatory loans went out of business altogether. Today, those loans are gone. But has predatory lending disappeared? No.