Wednesday, July 17, 2024

Does My Credit Score Affect My Mortgage Rate

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Is It Important To Compare Mortgage Rates

How does my credit score affect my mortgage rate?

Comparing mortgage rates is one way to save money on your home loan. If you accept the first offer you see, you may regret it later. With so much competition in the lending industry today, you can usually find a lower rate if you do a little price comparison.

The easiest way to find low rates is to shop around. This is really easy in todays internet-driven world. There are loan calculators, comparison tools, lender portals, and more all designed to help you line up offers to see which is giving you the right deal.

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What You Need To Know

  • Your credit score affects the mortgage rate you receive
  • You can improve your credit score by making on-time payments, not maxing out your credit and diversifying the types of credit you have
  • Other factors like income, the state of the housing market and economic inflation also impact mortgage rates

How To Improve Your Credit Score To Get A Better Interest Rate

If youre concerned about how your credit score will affect your mortgage approval, you can take steps to improve your credit score now. Your score wont go up overnight, but slow and steady improvements can make a big difference in the interest rate youre offered once youre ready to apply for a home loan.

Several factors affect your credit score, including your amount of debt, payment history, and the length of your credit history. You can take actions to improve several of these factors.

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Make Sure It’s A Fico Score

One final thing – the variances in rates described above are based on FICO credit scores – the ones lenders typically ask for when evaluating a borrower for a mortgage. However, if you order your credit score from one of the three credit rating agencies, there’s a good chance it will be based on a proprietary rating system and not a FICO score.

These proprietary systems can produce scores that vary significantly from a FICO score and may give a consumer the impression their credit is better than it is. You can obtain your Equifax or Transunion FICO score for free through or for a fee from either company just make sure the score you’re obtaining is specifically identified as your FICO score. You cannot obtain your FICO score from Experian, as it no longer provides customers with FICO scores but will only provide them with scores produced by alternative credit scoring systems.

Consider The Term Or Length

Heres how much your credit score affects your mortgage rate

Along with your credit score, the length or term of your loan can also affect your FHA mortgage rate. We talked about this above.

If you chose a 15-year fixed loan, you would most likely qualify for a lower rate than if you used a 30-year mortgage option. Granted, your monthly payments will be higher, since youre compressing the repayment into a smaller period of time. But you also pay a lot less interest over the life of the loan, compared to what you might pay on a 30-year FHA loan.

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You Need An Excellent Credit Score For The Best Rates

What does all this mean? Well, before shopping for a house, you may want to take a look at your credit score. Making moves to increase your score, like checking credit reports for errors, lowering your debt utilization by paying off your credit card balances in full each month, and making all your payments on time, can help you boost your score before applying for a loan.

If you plan to put less than 20% down on your new home purchase, youâll need a 760 credit score to get the lowest PMI and mortgage rates. But if youâre making a down payment of 20% or more, a 740 score is usually enough to secure the best mortgage rates and loan terms.

Even if you canât lock in that perfect score, just a few points can push you into the next underwriting level for somewhat lower rates. And that small change can save you thousands over time.

The Bottom Line: How Does Credit Affect Buying A House

When it comes to getting a mortgage, your credit score could make a big difference. The relationship between credit scores and interest rates is negatively correlated â which means that if you have a higher credit score, then youâre likely to get a lower interest rate. This also means your monthly payments will be less expensive, and youâll pay less interest in the long run. So, before you apply for a mortgage, be sure to check your credit to determine if now is the best time for you to buy a home.

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How Do Lenders Make Their Decisions

Not all lenders think the same way, and they may have different ways of making their decisions. But all of them will look at some key factors to help them decide. These include:

  • information on your on your credit report including your credit history and public record data
  • information youâve given them on your application form
  • information they may already hold on you, for example if you have a bank account with them
  • their own lending policy, which may be different from those of other lenders

Looking at your credit report will give them a detailed insight into your credit history, and will show things like how much you owe on credit cards, if youâre registered to vote and if youâve missed payments in the past. Theyâll put that all together and give you a credit score of their own.

Improve Your Credit Scores Before Opening New Credit Accounts

How Does Credit Score Affect Mortgage Interest Rate?

Remember: The better your credit scores, the better your interest rates might be. That means improving your scores might help you qualify for better rates.

Here are some ways you can improve your credit scores:

Speaking of applying for credit: Want a better idea of whether you might be approved? Pre-approval or pre-qualification can help you find out whether you might be eligible for a credit card or loan before you even apply.

With Capital Oneâs pre-approval tool, for example, you can find out whether youâre pre-approved for some of Capital Oneâs credit cards before you submit an application. Itâs quick and only requires some basic info. And since it only requires a soft inquiry, checking to see whether youâre pre-approved wonât hurt your credit scores.

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Why You Want A Nice Credit Score For A Mortgage

In the example above, your monthly payment goes up slightly as your interest rate increases. The numbers might not seem alarming because your interest rate changes by less than a percent. However, over the life of the loan, the amount of interest paid is a difference of tens of thousands of dollars.

To make a long story short, your credit score matters.

Pro tip: You can use Alliants mortgage rate calculator to get a better idea of how your interest rate will change based on your credit score.

Why Your Credit Tier Matters

The fact that lenders use credit tiers to determine rates is very important. It means you might be able to secure a lower rate without improving your score all that much.

Suppose your current score is 718 or 719. Youd have to move it up only a point or two to get yourself into a higher tier with a lower mortgage rate. And most of us can move our scores a few points within a month or two.

However, the opposite is true, too.

Lenders routinely make a final check on your credit score in the last few days before closing. And if your score has fallen into a lower tier, you might face a higher mortgage rate. So be careful not to open new credit lines, miss payments, finance big-ticket items, or do anything else that could harm your score prior to closing.

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What Credit Score Do I Need For A Mortgage

There isnât a specific credit score you need for a mortgage, and thatâs because there isnât just one credit score.

When you make an application for a mortgage or other type of credit, lenders work out a credit score for you. This is to help them decide if they think youâll be a risk worth taking – if youâll be a responsible, reliable borrower and likely to repay the debt. Usually, a higher score means youâre seen as lower risk â the more points you score, the more chance you have of being accepted for a mortgage, and at better rates.

Once Your Mortgage Is Finalized

How Does My Credit Score Affect My Mortgage Rate?

Once your mortgage is finalized, youre officially a new homeowner. What does that mean for your credit score? In the beginning, your credit score will likely drop because credit scoring models dont yet have any proof that youll successfully make the payments. Another drop can occur due to the new account causing your average account age to decrease.

On the other hand, if you dont have any installment loans yet, a mortgage can improve your score by diversifying your .

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Do Some Mortgages Focus Less On Credit Scores

So, what are the best mortgage options if you have bad credit? Conventional mortgages focus greatly on credit score and creditworthiness in their credit assessments. However, other mortgage sources offer more relaxed lending guidelines, including:

If youre not sure how to decipher the best lending options based on your credit score, working with a company that offers bad credit home loans in Houston can help!

How Much Does A Credit Score Affect Your Mortgage Rate

Multiple factors can impact your mortgage interest rate including your loan amount, debt-to-income ratio, down payment, location, property type and use, and your credit score. If your credit score needs work, thats ok! Your score is just one of many factors. Yes, your score will influence your rate, but you can improve your credit score with some hard work.

Before you apply for a mortgage, its helpful to know your credit score up front. You can verify your score for free every 12 months. Visit to access each of your reports from the three credit bureaus.

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How Does Credit Score Affect Mortgage Rates

The table below tells you the answer to the question “does credit score affect mortgage rates.” It shows what you’d pay per $100,000 in mortgage debt with various credit scores if you took out a 30-year fixed-rate mortgage.

FICO® Score range Extra interest compared with excellent credit

You could pay more than $31,000 in extra interest per $100,000 borrowed if your score is very low compared to very high. Even dropping down just one score range could cost more than $4,000 in extra interest for each $100,000 borrowed over the life of your loan.

How To Get The Best Rate Possible

How does your Credit Score Affect your Mortgage Rate

To recap, your credit score affects your FHA mortgage rate by serving as a risk-assessment tool for the mortgage lender. Higher scores can help borrowers qualify for lower rates, while the opposite tends to be true as well.

Generally speaking, borrowers with credit scores between 760 and 850 qualify for the best mortgage rates available at a particular time. Thats based on the FICO scoring range, which goes from 300 to 850.

But even if you fall short of that ideal range, there are certain things you can do to get the best possible rate on your FHA loan.

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How A High Credit Score Could Save You Money

Lets say, for example, you plan to get a 30-year fixed-rate mortgage for $300,000. Heres what your loan could look like if you had a credit rating in the 760 to 850 range, compared with one in the 620 to 639 range. Not only would your monthly payment be lower, but you could save $95,680 on interest over the life of the loan.

760-850 credit score

1 APRs are based on national averages and do not reflect Bank of Americas rates. Source:, October 2021.

This example is provided for comparison purposes only and does not constitute a commitment to lend nor is intended to guarantee that you currently qualify for the example APRs above.

Mortgage Rates By Credit Score

Think of your mortgage rate as the amount of money you pay each year for your loan, expressed as a percentage. Your annual percentage rate is a broader measure of this cost that includes other charges, such as certain closing costs. The idea is that your APR gives a fuller picture of what youâre paying.

Hereâs how the APR on a home loan could be affected by the borrowerâs credit score, and how that changes the monthly mortgage payment:

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What Makes Up A Credit Score

Most lenders use FICO scores to determine creditworthiness. These are three-digit numbers put together using data from the Fair Isaac Co. that are supposed to determine the likelihood of you keeping up with your financial obligations. The most important factor in your credit score is your payment history for example, how often you have paid your credit card or auto loan bills on time. The next largest influence is how big your debts are compared to how much credit you have available. The lower this ratio the better. Your credit score is also determined by the length of your credit history, the types of credit you use and how much recent credit you have applied for and/or received.

How Many Years Of Credit Do I Need To Have A Good Score

How Does My Credit Score Affect My Mortgage Interest Rates?

Mortgage lenders will typically look back over the last six years of your credit history. If youre young and only have a couple of years credit to examine, lenders may be more cautious to lend to you. However, theres no set timeframe that will automatically boost your credit score. A 25-year-old in regular, stable employment who uses their credit card sensibly could have a better credit score than a 50-year-old with lots of debts.

The key thing to remember here is that you dont just need years of credit to improve your score those years of credit have to be good credit. Bankruptcy, CCJs, IVAs and other bad marks will stay on your file for six years, so its highly likely youll need to wait for these to be wiped before being accepted for a mortgage.

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Top Tips To Improve Your Credit Score

According to, credit scores can range from 300 to 900. With 660 to 724 being considered good 725 to 759 being considered very good and 760 and up generally being considered excellent. Individuals with scores under 600 will have more difficulty getting credit, as they fall into the poor credit range.

To manage your credit score:

  • Review your credit report at least once a year: Equifax and TransUnion offer online services for convenient access to your credit score.
  • Correct any errors on your credit profile: Once you have contacted the to file a claim, they will investigate the errors. You are also able to correct errors by filling out the appropriate paperwork.
  • Apply for credit only when you need it: Applying for multiple forms of credit in a short amount of time may impact your credit score. However, if customers are rate shopping, they are typically given a leeway period of up to 30 to 45 days. During this time, multiple inquiries generated for a search category may be counted as one inquiry mortgages and car loans would count as separate search categories and would be considered two credit inquiries.
  • Keep balances low: It is recommended that you keep your balances below 30 percent of your limit across all credit cards. Although, if you can manage even lower utilization your score can be better. Credit utilization accounts for almost one-third of your FICO score.
  • The Initial Credit Score Hit

    Immediately following getting a new mortgage, expect your credit to suffer. Your credit score is a numerical representation of your ability to pay back a debt obligation. When you take on the largest loan that most consumers will ever have, your score goes down until you prove that you have the ability to pay back the loanand that you will actually make the payments you promised.

    Because of this temporary lowering of your score, you may find it difficult to get other loans or get a loan with the credit terms you would expect. Plan to wait at least six months before applying for any loan of significant size.

    A mortgage is the pinnacle of consumer credit, where, if you can qualify for a mortgage youre considered a trustworthy borrower.

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    How Can I Improve My Credit Score

    is not something you can do overnight but what you may be able to do in a short period of time is assess your current financial situation, and put together a plan to help guide you towards a better credit score.

    This plan could include:

    • Figuring out your regular expenses
    • Putting together a disciplined payment schedule for any current debts
    • Building a budget that allows you to save a regular amount every fortnight/month while still making any debt repayments necessary
    • Setting a reminder for paying bills
    • Consider , if that is beneficial for your personal situation
    • Putting the brakes on any further discretionary spending.

    Changing your credit score for the better can be a challenge, but the sooner you start, the sooner your credit score might start creeping up.

    This article was reviewed by our Finance Editor, Sean Callery, before it was published as part of our fact-checking process.

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