If Ine Most Stanney can afford to pay per year in mortgage payments is $12,000, and his credit score is currently 544. According to the following table for a $150,000 mortgage, by how many points would he need to improve his credit score in order to take a mortgage for $150,000?
| FICO Score | Interest Rate | Monthly Payment |
|---|---|---|
| 720-850 | 5.59% | $860 |
| 700-719 | 5.71% | $872 |
| 675-699 | 6.25% | $924 |
| 620-674 | 7.40% | $1,039 |
| 560-619 | 8.53% | $1,157 |
| 500-559 | 9.29% | $1,238 |
A. 156 points
B. 14 points
C. 131 points
D. 76 points
Answer (2)
Ine Most Stanney needs to improve his credit score by 76 points to qualify for a $150,000 mortgage. His current score is 544, and the minimum required score for favorable mortgage payments is 620. By reaching this score, he can pay less than $1,000 per month on his mortgage.
;
Calculate the maximum affordable monthly payment: 12 $12 , 000 = $1 , 000 .
Identify the minimum FICO score required to achieve a monthly payment less than or equal to $1 , 000 , which is 620.
Calculate the difference between the required FICO score and Stanney's current score: 620 − 544 = 76 .
Stanney needs to improve his credit score by 76 points.
Explanation
Calculate Maximum Monthly Payment First, we need to determine the maximum monthly mortgage payment Stanney can afford. Since he can afford to pay $12 , 000 per year, we divide this amount by 12 to find the maximum monthly payment: 12 $12 , 000 = $1 , 000
Identify Required FICO Score Next, we examine the table to find the highest FICO score range for which the monthly payment is less than or equal to $1 , 000 . From the table, we see that the monthly payment is $1 , 039 for a FICO score range of 620-674. This is the first FICO score range where the monthly payment exceeds $1 , 000 . Therefore, Stanney needs to have a FICO score of at least 620 to afford a mortgage.
Calculate the Score Difference Now, we calculate the difference between the minimum required FICO score and Stanney's current FICO score. Stanney's current FICO score is 544, and the minimum required FICO score is 620. The difference is: 620 − 544 = 76
Final Answer Therefore, Stanney needs to improve his credit score by 76 points to be able to afford the mortgage.
Examples
Understanding credit scores and mortgage payments is crucial in real life when planning to buy a home. For instance, if you want to purchase a house but your current credit score results in a high interest rate and unaffordable monthly payments, you can use this type of analysis to determine how much you need to improve your credit score to qualify for better terms. By improving your credit score, you can secure a lower interest rate, which translates to lower monthly payments and significant savings over the life of the loan. This proactive approach to financial planning can make homeownership more accessible and affordable.
