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PAYING EXTRA MONEY

Question: I can understand why borrowers with a very low credit score must pay higher loan rates or can’t get a mortgage at all. But my credit score is a little above average, so why is the bank demanding that I pay extra money before I get a loan?

Answer: There are several reasons why you must come up with more up-front money in order to get a mortgage. First and foremost, several studies have shown that thee lower a borrower’s credit raring, the greater the chance that borrower will get into default and foreclosure. Banks have known this fact for decades, but were willing to ignore it during the past several years, figuring that they could simply foreclose on the few borrowers who might not be able to make their payments, sell the foreclosed property to cover the outstanding balance of he loan—and perhaps even boost their profits because sales values had soared.  Lenders are more cautious today, though, because the drop in prices in many cities means that they may not be able to sell a foreclosed home and get all their money back.  Fannie Mae and Freddie Mac, quasi-government agencies that help set lending standards, recently adopted rules that require most borrowers with a credit score of less than 680 to pay an additional 1.25 percent of their total loan amount in up-front cash.

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