Your Credit Scores Impact On Your Mortgage Rate

Aug 5, 2020Home Buying

Credit scores have a large impact on how lenders view you when you apply for any loan, especially a large loan like a mortgage. The rule of thumb is that the higher your credit score the lower your interest rate will be. So having a high credit score is crucial to getting a mortgage rate your comfortable with. Something seemingly as small as a single point or a half point on your interest rate can mean a huge difference in cost over time. Consider that on a 30-year mortgage if you’re paying about $60 less per month because of a half-point on the intrest rate, you’d save about $21,600 over the course of time. No small amount!

Before talking to a realtor you should know what your credit scores are from the 3 main federal credit bureaus as a lender may look at one or all of them. You can check your score in loads of places online for free and other sites that offer a paid service. No matter how you check your score it will give you an idea of it your credit is suitable to apply for a mortgage. If it’s lower than you expected you can also take measures to increase your scores before applying.

Ideal Credit Scores for Buying a Home

Most lenders will look at your FICO credit score which ranges from 300 (poor) to 850 (excellent) to determine the risk of providing you a mortgage loan. The higher your score is the more comfortable the lender will be to approve you for the loan. Scores are rated as follows:

  • 800 – 850 : Excellent
  • 740 – 799: Very good
  • 670 – 739: Good
  • 580 – 669: Fair
  • 300 – 579: Poor

Each lender will have its own method to determining interest rates based on the size of the loan and your credit score, even just a few points up or down on your credit score can make a big difference. Consider if your score is 739 (good) instead of 740 (very good). This could have a substantial impact on the rate you receive.

You can use free online loan calculators at places like myFICO.com which looks at the type of loan, your credit score, the loan amount, the loan terms of length, the down payment percentage, the property value, and the home location. It’s recommended to use these free tools prior to applying for a loan. But also you can see how a few differences in your credit score or down payment can make a huge difference in the loan cost over time.

If My Credit Score is Low Can I Still Get a Mortgage?

The short answer is yes you can. But the hard truth is that you’ll pay higher interest rates and that means higher monthly payments and more costly over time. Lenders will also look at other varieties more carefully then such as how much debt you have if you’ve had any major credit problems and other areas of your finances.

Financial requirements like credit scores also vary from lender to lender, so a loan could look a lot different from 2 different lenders even with all other things the same. It’s a smart idea to get multiple offers from lenders to compare how they hold up to one another.

Let’s take a look at some of the different credit score minimum for various mortgage loan varieties:

Conventional: you can have a score as low as 630 and still get approval but may need to have things like a higher income or other financial factors that will get you approved despite a low credit score.

VA Loans: These are loans backed by the United States Department of Veterans Affairs (VA), and are only available to active or retired military as well as their families. The US government doesn’t have a minimum credit score requirement but many VA lenders will still want you to have a score of at least 620 – 630.

FHA Loans: These are loans provided by the Federal Housing Administration (FHA) for individuals with low or poor credit. These loans also offer lower required down payments. you’re eligible to qualify for an FHA loan with a lower score of between 500 and 579 provided you can pay a 10% down payment. If your score exceeds 580 then your required downpayment will be at least 3.5%

USDA Loans: The Department of Agriculture also has a loan program (USDA loans) for low to medium-income individuals looking to buy a home in traditionally rural areas (hence the backing by the department of agriculture). You’ll need a score of at least 640 to qualify. You can still qualify with a lower credit score but the lenders will then most likely look at other aspects of your financial history to receive approval.