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When planning to buy a home, you’ll want to get the best possible mortgage rate. And to secure that, one of the most important factors you need to pay attention to is your credit score. Generally, the higher your credit score is, the lower (better) the interest rates you can qualify for.
Before looking for houses or submitting your paperwork, it’s important to know if and how your credit score affects your mortgage rates and the long-term cost of your home.
What's Considered a Good Credit Score?
Your credit score is commonly calculated with the Fair Isaac Corp (FICO®) model for credit scores. It's derived from the information in your credit report — including a history of your payment habits with loans — as compiled by credit reporting companies.
Generally, there are two types of credit-scoring models that lenders use: base scores and industry-specific scores. These are slightly different.
The base scores range from 300 to 850, with the higher score indicating less risk for lenders. Base scores are what you may see when you check your FICO® scores after logging into your credit card account or paying for FICO® scores online.
- 300 - 559: Poor
- 580 - 669: Fair
- 670 - 739: Good
- 740 - 799: Very Good
- 800 - 850: Excellent
The industry-specific scores range from 250 to 900, tailored for certain credit products like credit cards, auto loans, and mortgage loans. FICO breaks down its ranges based on the FICO® 8 scoring model.
- 250 - 579: Poor
- 580 - 669: Fair
- 670 - 739: Good
- 740 - 799: Very Good
- 800 - 900: Excellent
The lending industry sets up the credit score scale into 20-point increments and adjusts the rates it offers borrowers each time a credit score moves up or down. For example, if your score increases from 740 to 760, you’re likely to see a slight decline in the rate you’ll be offered.
In addition, you can use the Loan Savings Calculator from myFICO to compare the interest rates, monthly payment, and total interest cost of a mortgage based on your state and mortgage size.
Why Credit Scores Matter for Mortgage Rates
In addition to having a low debt-to-income ratio and strong financial record, having a high credit score can help lower the mortgage rates you’ll be offered.
Lenders heavily rely on credit scores as an indicator of your ability to meet your obligations. They want to lend to individuals who have a better record as this generally shows your record of on-time payments to creditors. Achieving a higher credit score can help reassure lenders that they will be repaid the loan owed.
For instance, let's say you're looking to purchase a home worth $300,000, have a 20% down payment, and you apply for a 30-year fixed rate loan. Your current FICO credit score of 780 gets you a 4% mortgage rate which amounts to $1,164 per month (excluding tax, insurance, and homeowners association fees).
However, if your credit score drops to 680-699, your rate can increase to about 4.5%. In effect, your monthly payment increases to $1,216, adding another $62 per month or $744 per year.
Essentially, a higher credit score can help you qualify for a loan with better terms, like lower interest rates, which can save you money on interest payments. Better credit scores can also make it easier for you to be approved for better mortgage rates.
Credit requirements can vary depending on the lender. As such, it's best to shop around with different lenders to find one that works for you.
What a Low Score May Mean
A low credit score may make it less likely for you to qualify for the most desirable mortgage rates. This could potentially lead to rejection of your mortgage application. But it’s still possible to be approved if you add a co-signer or reduce the overall amount you intend to loan.
Here are different mortgage types available for typical minimum credit scores:
- Conventional loans - Some lenders may accept a 620 credit score but will need other requirements (e.g., higher income).
- FHA loans - A credit score of 500-579 can apply a 10% down payment. A score of 580 or higher can put down as little as 3.5%.
- USDA loans - Generally requires a minimum score of 640. However, some lenders will consider a lower score with additional analysis of your credit.
- VA loans - The government doesn’t have a minimum credit score requirement, but many lenders may require a minimum score of 620.
How to Improve Your Credit Score
If your credit score isn't excellent just yet, these steps can revive and improve it.
- Always pay your bills (credit cards, loans, rent) on time.
- Avoid closing older credit lines after paying them off.
- Check your credit report for errors and have these corrected or updated.
- Don’t open new lines of credit or take out large loans.
- Pay down high-balance credit cards and spend no more than 30% of your credit limit.
- Shop for mortgage rates only within a 30-day period as too many inquiries can lower your score.
- Work with a credit counselor to rebuild your credit.
In a nutshell, yes, your credit score can affect your mortgage rate. Moreover, the difference between having a good and excellent credit score can be significant in terms of the interest rates you can get. Fortunately, there are actionable steps you can take to get a desirable credit score for a better mortgage rate.
Are you looking to buy a home in Las Vegas? Contact The Brendan King Group today, tell us what you’re interested in, and find out how we can help.
