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How Credit Score Affects Your Mortgage Rate

How a Higher Credit Score Can Help You Save on a Mortgage

Without a high credit score, you will not be eligible for the best mortgage rates available, which may mean that you will have to pay more during the term of your mortgage. For example, the difference between 3% and 3.25% may increase, especially if you are applying for a 30-year fixed-rate mortgage.

Why Your Credit Score Is Important To Lenders

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How Credit Score Affects Your Mortgage Rate 3

With a low debt-to-income ratio and strong financial history, you’ll need a high credit score for the lowest mortgage rates. Why?

You may be reluctant to lend to a friend who usually takes you forever to repay or never repays you at all. Lenders feel the same way about mortgages. They want to lend to people who have a record of timely repayments to lenders.

Lenders rely on credit scores as an indication that the borrower will meet obligations. Experts say a high credit score reassures lenders that they will be repaid.

Your credit score is often calculated with the FICO scoring model and is derived from the information in your credit reports, compiled by credit reporting companies. Your reports include the date of your payment habits along with the loan amount.

How do mortgage lenders determine interest rates?

Mortgage lenders consider a number of factors when deciding whether you may be eligible for a mortgage and the interest rate offered. Your interest rate will have a big impact on the total you will pay on the mortgage term and this is an important factor that can save you money on your loan expenses. Your rate may depend on you:

  • Credit Score: A higher credit score can help you achieve lower interest rates. FICO® Scores☉, 90% The credit scores used by top lenders range from 300 to 850, but you don’t need the highest score to get the best rates. Once your credit score reaches 700, you may be eligible for the best lending rates for lenders if you meet their other requirements as well.
  • Down Payment: Large down payments can also lead to lower interest rates. If you can deduct at least 20%, you will also avoid paying for mortgage insurance.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) depends on your monthly income and debt repayments. Low DTI can help you qualify for lower interest rates. Keep in mind that your income does not appear on your credit report, so the lender calculates the DTI separately.
  • Types of loans: There are many types of mortgages, including conventional loans and government-sponsored FHA loans, VA loans, and USDA loans. Although government-assisted loans may offer lower rates, they may require fees or insurance which adds up to your total cost.
  • Loan size, term, and interest rate: The amount of your mortgage, the repayment period, and the type of interest rate (fixed or adjusted) may affect your offer. In general, you can get a better rate with a loan that is not particularly small or large, and if the term is short. Adjustable-rate mortgages may start at a lower rate but may increase in the future, while a fixed-rate mortgage is closed at the same rate for the life of the loan.
  • Discount points: You can buy points to lock in lower interest rates and pay higher closing costs.
  • Location: Home location can also affect mortgage rates, but it can’t vary much unless you’re looking at homes in different states or metro areas.

There are some factors that can affect mortgage rates but they are completely out of your control. For example, rising interest rates and inflation can cause a mortgage lender to change its offerings. Your rates may vary depending on the lender.

How Much Can A Good Credit Score Save You?

A good credit score does not guarantee that you will get a mortgage approval or the best rates, but it can help. And since mortgages are usually large loans, even a small change in your interest rate can save you a considerable amount of money on your monthly payments and how much interest you pay overall.

The cost of a 30-year fixed mortgage based on your credit score

Given the national average mortgage rates, your annual interest rate (APR) can vary by more than 1.5%, and a high credit score can help you save about $ 100,000 overall. The results show that you put down 20% and took out a $300,000 mortgage with a 30-year term and fixed interest rate.

Mortgage Cost by Credit Score
FICO® ScoreAPRMonthly PaymentTotal Interest
High (760 to 850)4.05%$1,441$218,727
Medium (680 to 699)4.449%$1,511$243,952
Low (620 to 639)5.639%$1,730$322,664

How To Improve Your Credit Before Getting A Mortgage

Improving your credit can take time, and details will depend on your unique credit profile. In general, having a long history of timely payments can help you get a mortgage with favorable terms. If you are looking for a mortgage or plan to start a home hunting soon, you may want to:

  • Check your credit score. Mortgage lenders can get three credit reports and credit scores, one each from Experian, TransUnion, and Equifax, and use an intermediate score. Most mortgages rely on specific FICO® score models. You may need to pay to check these scores, but you can get a free FICO® Score 8 from Experian so you can get a general idea of ​​where you are.
  • Don’t miss out. Debt settlement can make a difference in your credit score. While finding a home can be stressful, make sure you don’t forget to pay off a credit card or debt by mistake.
  • Pay credit card balance. Credit card debt repayment can reduce your credit usage ratio, or the amount of credit available you can use, which can dramatically improve your credit score.
  • Pay past due accounts. Unpaid deposit accounts can affect your eligibility for a mortgage. And while the new scoring models ignore paid deposit accounts, credit score mortgages are not commonly used by lenders. However, it is better to show you past due accounts than to ignore them.

How To Build Your Credit Score

Here are some of the best ways to build your credit score:

  • Pay on time, including rent, credit cards, and car loans.
  • Don’t spend more than 30% of your spending on credit cards.
  • Pay off a high-balance credit card and consider transferring the balance to clear the credit.
  • Check for any errors in your credit report and work to correct them.
  • Purchase mortgage rates within a period of 30 days. Too many spread-out queries can lower your score.
  • Work with a credit counselor or lender to build your credit.

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