The most Mimi can afford to pay per year in mortgage payments is $12,500, and her credit score is currently 531. According to the following table for a $150,000 mortgage, by how many points would she need to improve her 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% | $1039 |
| 560-619 | 8.53% | $1157 |
| 500-559 | 9.29% | $1238 |
A. 89 points
B. 144 points
C. 29 points
D. 169 points
Answer (2)
Mimi must improve her credit score by 89 points to qualify for a $150,000 mortgage. This is determined by calculating her maximum affordable monthly payment, identifying the lowest FICO score range that meets this payment, and assessing the difference from her current score. Hence, the answer is option A: 89 points.
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Calculate the maximum affordable monthly payment: 12 $12 , 500 ≈ $1041.67 .
Identify the lowest FICO score range with a monthly payment less than or equal to $1041.67 , which is 620-674 ($$1039 monthly payment).
Determine the minimum required FICO score: 620.
Calculate the difference between the minimum required score and Mimi's current score: 620 − 531 = 89 points. The final answer is 89 points.
Explanation
Calculate Maximum Affordable Monthly Payment First, we need to determine the maximum monthly payment Mimi can afford. We know she can afford to pay up to $12,500 per year. To find the monthly equivalent, we divide the annual amount by 12:
Maximum Monthly Payment Maximum affordable monthly payment = 12 $12 , 500 = $1041.67 (approximately).
Identify Qualifying FICO Score Range Next, we examine the table to find the lowest FICO score range that results in a monthly payment less than or equal to $1041.67.
Determine Minimum Required FICO Score Looking at the table, we see that a FICO score range of 620-674 results in a monthly payment of $1039, which is less than $1041.67. The next lower FICO score range, 560-619, has a monthly payment of $1157, which is too high.
Calculate the Required Credit Score Improvement Therefore, Mimi needs a minimum FICO score of 620 to afford the mortgage.
Calculate the Difference Mimi's current credit score is 531. To find out how many points she needs to improve, we subtract her current score from the minimum required score: 620 − 531 = 89 points.
Final Answer Therefore, Mimi needs to improve her credit score by 89 points to be able to afford the $150,000 mortgage.
Examples
Understanding credit scores and mortgage affordability is crucial in real estate. For instance, consider a scenario where a young couple wants to buy their first home. By improving their credit scores, they can qualify for better interest rates, which significantly reduces their monthly mortgage payments. This allows them to afford a more desirable home or save money over the life of the loan. This problem demonstrates how a higher credit score can directly translate to financial benefits in homeownership.
