A good credit score is like having a strong professional network – it’ll open a lot of doors for you.
Behind those doors, you may find perks, like qualifying for a higher spending limit on a credit card, having a better chance of being approved for large loans and earning lower mortgage rates.
While your credit score is certainly an important factor in determining your mortgage rate, it isn’t the end-all-be-all. Multiple factors that are within and outside of your control come into play as well, but we’ll get to those in just a bit.
Your Credit Score, Explained
Think of a credit score as a buyer rating on an online marketplace. A higher buyer rating usually means the seller is more likely to do business with a buyer and less likely to have problems receiving payment.
Basically, your past actions directly affect how and if potential lenders will offer you their money.
The key thing to remember is that your credit score can change. Here are some of the main factors that determine how your credit score is calculated:
- Payment history — make sure you’re paying your bills on time.
- Credit limit usage (aka credit utilization) — avoid maxing out on your card.
- Credit history — measures how long you’ve had credit.
- Credit portfolio — the types of credit you have.
Your score will be reported by one of three credit bureaus: Equifax®, Experian™ or TransUnion®. You should check your credit report with these agencies at least once a year.
You know the game, so get to know the players
You might be thinking, “I pay my credit card bill on time. I’m good to go, right?” Well, that certainly helps. But having a diverse credit portfolio can also help improve your score. Here are a few other common forms of credit:
- Home loans (mortgages, home equity loans, HELOCs, etc.)
- Car loans
- Personal loans
What Is a Mortgage Rate?
A mortgage rate is the interest rate you pay on your mortgage.
What you end up paying depends on a bunch of factors. But I’m sure you can guess which one is the most important.
If you guessed “credit score” – that’s five gold stars!
How Does Credit Score Affect Mortgage Rate?
When applying for a mortgage, the mortgage lender will want to get to know you as best as they can. But save the personal stories. They want to know your financial profile and your creditworthiness.
Luckily for them, there are multiple resources out there to figure out the type of borrower you’ll be. No resource will be more telling than your credit score.
Your credit score indicates to a lender how well (or not so well) you paid back borrowed money in the past.
Now, let’s see your good credit score in action.
While the lender will offer you an interest rate based partly on your current credit score, the higher your credit score, the more likely a lender will offer you a lower interest rate. On the flip side, a low credit score means higher interest rates.
When credit scores go up, mortgage rates go down.
Lower interest? Score!
You can either take our word for how your credit score affects your mortgage rate, or you can check out this nice example chart:
Let’s assume that you’re borrowing $200,000 with a 30-year fixed-rate mortgage.
|Credit Score||Interest Offered||Monthly Payment||Total Paid Over Life of Loan|
|680 – 739||4%||$954.83||$343,739.01|
|620 – 679||5%||$1,073.64||$386,511.57|
**Example chart does not reflect current rates or what you may be approved for. Please contact a lender or financial advisor for more information on your specific situation.
Your credit score can reduce your monthly mortgage payment by $100, saving you $40,000 over the life of the mortgage.
While saving 1% or 2% in interest doesn’t look like a whole lot, over the life of a loan, it can save you thousands of dollars.
How low can you go?
Typically, the lowest credit score lenders will accept hovers between 620 and 680. This will vary from lender to lender, but if you’re concerned about being below the threshold, scroll down just a smidge.
Don’t worry, you have options
If you’re on the lower end of the credit score spectrum, don’t worry. There are a variety of mortgage options for people with lower credit scores:
- FHA loans
- VA loans
One of Many: Other Mortgage Rate Factors
There are so many factors to consider when you’re looking to buy a house. You wonder if you’re buying in the right location. You wonder if the house is big enough and if you can afford it.
Getting a mortgage rate is no different. And there’s more to getting a favorable mortgage rate than just your credit score.
You’re still at the wheel
Here are some additional factors within your control that can affect your mortgage rate:
- Down payment — A larger upfront down payment generally equals lower interest rates.
- Loan term — Paying back your loan over a shorter period of time will typically earn you lower rates.
- Home location — Rates can fluctuate from state to state.
- Personal income — Are you employed, and is your income stable?
- The type of loan you choose — There are a wide variety to consider: fixed-rate mortgages, adjustable-rate mortgages, FHA loans and VA loans.
- Debt-to-income (DTI) ratio — Do outstanding debts dwarf your yearly income? Lenders prefer a DTI of 36% or lower, though lenders may consider a DTI of up to 50% if your credit and credit history are good.
❓ Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!What Is DTI?
🟢 On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.How much can I afford?
🟢 On Track – You’re right on track for your house-buying journey!How much can I afford?
🚨 Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.What Is DTI?
🚨 Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?
The market is the captain now
Now, let’s take a look at the mortgage rate factors outside of your control:
- Housing market — the state of the national and local housing market will affect the rate you receive. Fewer homes being purchased could equal lower interest rates.
- Inflation — lenders must estimate for changes in inflation, which can impact the rate they offer you.
Give Yourself A Little Credit
You are in control of your personal credit destiny.
Now, saying that out loud might sound a little too deep, but, seriously, it’s never a bad time to improve your credit.
“So, where do I start?”
Well, it’s funny you ask. We just happen to have an in-depth list of actions you can take to improve your credit.