Let’s give credit where it’s due – to you. You’re here because you’re looking into how your credit score affects your ability to buy or refinance a home and to understand how your credit can impact the rates you’re offered.
You likely know that your credit score matters and it is one of the primary factors that can impact your home loan terms and your mortgage interest rate (others being your loan amount, down payment, debt-to-income ratio, etc.). You may even know what your credit score is right now. But you may not know how your credit score translates into what rate you can qualify for. This is understandable. There are a lot of variables and nuances at play when evaluating how your credit score affects your mortgage rate.
Not to worry –we’re going to break it all down.
Why does my credit score matter and how can it affect my mortgage rate?
Lenders use your credit report to evaluate your creditworthiness. That is, whether you as a borrower represent a low risk or high financial risk when getting a loan or credit. The mortgage lender will evaluate your history of making payments on things like loans, credit cards and bills to determine how responsible you are with paying off your debts. If you have a strong history of on-time payments, you’ll have a higher credit score – which means you pay less for lower lender risk and can likely get a lower mortgage rate, which means a lower monthly payment. If, on the other hand, you have a spotty payment history, you’ll pay more for greater lender risk (of default, late payments, etc.) so you’ll likely receive a higher rate, which means a higher monthly payment.
While it may not seem like a slightly higher rate makes much of a difference – even less than a one percent difference – it does. A higher credit score can earn you a lower rate which can translate to tens of thousands of dollars in savings over the life of the loan (imagine if you have a 30-year loan term). So your credit score is a critical factor in regards to mortgage rates. Still, if you have a low credit score, take heart; it’s just one factor in a broader set of requirements lenders will evaluate. Also, we’ll give you some suggestions below for what to do if you have a low credit score.
FICO score and credit score ranges
Your credit score is a three-digit number within the point range of 300 to 850. Most lenders use the FICO (Fair Isaac Corporation, a software company that produces the most widely used consumer credit scores), scoring model when looking at your credit report. The report is comprised of data from credit reporting agencies like Experian, Equifax and TransUnion . At AmeriSave, the credit report we use with your mortgage application provides three credit scores for each applicant. AmeriSave uses the middle score of the three, or the lowest credit score if only two are provided.
Lender guidelines differ, of course, so different lenders consider different credit scores to be “good.” Some lenders also have different standards for what score ranges would give borrowers the lowest interest rates, so it’s difficult to provide a typical range of credit scores to mortgage rates. But in general, a credit score in the 700 range will typically result in lower interest rates, though you may still fall into the “good” range with a score of 680 or higher. This illustrates how much a rate can differ based on credit score ranges, and ultimately how much due poor vs. great credit can impact a monthly mortgage payment.
Do different loan types affect credit scores differently?
You may be wondering if there are certain loan types where credit scores matter less. While conventional and jumbo loans put a substantial focus on credit scores, you may find that there’s more leniency with government backed loan programs such as FHA, VA and USDA loans, particularly with regard to minimum credit score requirements. The minimum credit score for AmeriSave’s conventional home loans is 620, while FHA , VA , and USDA loans require a minimum credit score of 600.
Keep in mind, however, that at some lenders, qualifying with a lower minimum credit score may result in other loan fees, such as an upfront fees and mortgage insurance premiums. And if you’ve paid points to your lender (simply meaning you’ve paid more money upfront to ultimately pay less over time) to obtain a lower interest rate, you may end up paying higher closing costs.
What if I have a low credit score?
If you’re concerned that your credit score is too low, or if you’ve had a bankruptcy or foreclosure in the past, it may affect your ability to qualify and/or be approved for a new mortgage. You may want to re-establish acceptable credit history and/or increase your score before applying again. But first, talk to a trusted loan originator or a credit or housing counselor to see what options are available to you based on your personal financial situation, such as a down payment assistance program. And if the bankruptcy or foreclosure was caused by situations beyond your control, talk about that too. On the flip side, if you already have a high credit score, you may want to weigh the pros and cons of refinancing now and consider calling a loan originator to understand how rates are trending.
Quick tips to improve your credit
- With time and discipline, you can improve your credit score. Here are some do’s and don’ts:
- Do pay your bills on time.
- Do pay off existing debt.
- Do consider working with a credit counselor.
- Do review your credit report to ensure it’s error-free. Report any mistakes or concerns to the appropriate credit bureau.
- Do maintain open credit accounts. It may seem counterintuitive but keeping accounts open shows a longer credit history. As an example, keep your oldest credit card open (but don’t necessarily use it!).
- Don’t make any large purchases using a credit card in advance of or during your mortgage application.
- Don’t take on new debt just before or during your desire to apply for a mortgage.
- Do keep learning! Continue reading articles on smart money management
Finally, do shop around. There can be benefits to shopping different lenders, since credit requirements, loan products and interest rates vary by lender. But before you begin shopping, consider finding out your credit score. You can do so by visiting annualcreditreport.com, which, under Federal Law, allows you to access to a free annual credit report. And in tandem with finding out your score, talk to one of our trusted loan originators. We have the expertise and resources to help you find the right mortgage with the best mortgage rate for you.