What is the “minimum FICO” rule and how has it been affecting homebuyers? Recent research from the Federal Reserve shows that this poorly understood lending practice has cost nearly ten percent of prime borrowers who are joint mortgage holders in higher interest rates. This money could have been saved if the mortgage was applied for by the individual in the couple with a higher credit score and an income sufficient to qualify for the mortgage.
The “minimum FICO” rule is often not understood by first-time loan applicants and those unfamiliar with the mortgage market, but it is followed by lenders and major investors such as Fannie Mae and Freddie Mac. In general, the lender will charge an interest rate based on the lower FICO credit rating in couples with differing credit ratings. Even if your credit rating is first-rate on the FICO scale, the lender will likely set the interest to the lower score.
The study examined a particularly large and detailed database of nearly 604, 000 standard home mortgages between 2003 and 2015. Of joint applicants with one partner whose score was below 740, over 25 percent could have reduced their borrowing cost by applying for the mortgage in the name of the individual with a higher credit score. For couples with one much higher income and a higher FICO score, or for couples who could both individually qualify, but whose FICO scores differ, applying in the name of the partner who is best placed in terms of income and credit score might be the wisest choice.
For those who want to enjoy joint ownership, it’s important to remember that couples can both be on the legal title to the house without having both names on the mortgage. However some couples with lower credit scores may see their scores rise if they join a partner in making mortgage payments. For more on this topic, see the Boston Herald’s report.
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