How Your Credit Score Affects Your Mortgage Rate

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Point of Interest

When it comes to the mortgage rates you’ll be offered while buying a home, nothing is more important than your credit score. A simple increase to your score can save you thousands of dollars in interest by lowering your mortgage rate.

Credit scores impact any borrowing or financial moves that we make, and this certainly extends to things like mortgage rates for homebuyers. While it is certainly possible to get a mortgage loan when you have poor credit, you can expect the rates to be higher than they would be for those with good or stellar credit scores. 

Not only that, but your mortgage score can also have an impact on how large a mortgage you can be approved for — and even how much you’ll have to pay for private mortgage insurance on the loan. So, if you’re in the market for a new mortgage loan, be prepared for your credit score to heavily dictate your mortgage rate.

How credit scores help determine mortgage rates

There are a number of factors that are taken into consideration by lenders when making a decision on what mortgage rate to offer a borrower. In addition to looking at your credit score and income, lenders will also consider factors that include:

Recent credit applications – One or two recent applications are ok, but a large number of recent credit applications can be a red flag for lenders, since multiple apps might be an indication of financial troubles or a dire need for more credit.

Your payment history – Lenders will look at your payment history on credit cards, lines of credit and loans to make sure you pay your obligations on time. If you have a solid history of on-time payments, it indicates to lenders that you’ll also be a good mortgage borrower.

Being an authorized user – When you’re an authorized user on another person’s credit card, it will pull in their activity to your credit report, making it look better if that person is a responsible borrower. Unfortunately, lenders will often discount this activity, since it doesn’t have any bearing on how you would handle a mortgage repayment.

Your credit utilization ratio – This ratio indicates how much of your available credit you’re currently using. Lenders prefer this ratio to be under 30%, so if your credit cards have a total of a $10,000 limit, you should try to keep the balance under $3,000.

Debt-to-income ratio – This indicates how much of your current income goes to servicing your debt. If the ratio is too high, it’s a red-flag that indicates to lenders that you shouldn’t take on more debt.

Disputes and derogatories on your credit report – These include things like bankruptcies, account collections, delinquent accounts or a charge-off. Lenders will also consider any statement disputes or pending disputes as a negative — and a pending dispute can hold up the mortgage underwriting process.

What credit score do I need to buy a house?

As your FICO score drops, the annual percentage rate you’ll be offered by lenders increases. A higher APR will increase your monthly mortgage payments, and while the monthly increase may not seem that significant, it can add up to tens of thousands of dollars over the course of a 30-year mortgage loan. 

It’s important to use a loan savings calculator to check out how a change in your FICO score can directly impact your monthly payment — as well as the total interest paid on a loan. 

The data in the table below is based on a 30-year fixed rate mortgage with a loan principle of $250,000.

FICO ScoreAPRMonthly paymentTotal Interest Paid
760-8502.621%$1,004$111,297
700-7592.843%$1,033$121,866
680-6993.02%$1,057$130,415
660-6793.234%$1,086$140,896
640-6593.664%$1,146$162,424
620-6394.21%$1,224$190,641

As you can see, a drop below a 760 score to the 700-759 range adds $29 monthly to your mortgage payment, but it also increases the total interest paid over the life of the loan by more than $10,000. It’s obvious from this table that increasing your credit score can yield very big savings when you’re talking about taking out a mortgage.

It should also be noted that as of August 2020, the COVID-19 pandemic had caused lenders to become more cautious with their mortgage underwriting. While interest rates are at historic lows, the high rates of unemployment and increasing numbers of missed mortgage payments have lenders closely examining credit scores and borrowers’ credit history.

Tips for improving your credit score

There are a number of ways you can increase your credit score to ensure you get the best rate possible on a loan, including:

  • Make all your payments (rent, credit card, loans, etc.) on time. This shows prospective lenders that you are a good borrower who can be trusted to pay your mortgage obligation on time each month.
  • Limit the balance on credit cards to no more than 30% of the limit. This will keep your credit utilization ratio below 30%, which is attractive to lenders who want to know you can afford to take on additional debt.
  • Check your credit report for any errors and get any you find corrected. Errors on your credit report might be unfairly lowering your credit score. By correcting any inaccuracies on your report, you can quickly and easily increase your credit score.
  • Wait until you’re ready to buy and shop for your mortgage rates within a 30-day period. This will minimize the negative impact of having too many hard inquiries on your credit report spread out over a longer period of time.
  • Use Experian Boost to get credit for your utility and cell phone payments. Experian says this simple step increases the average person’s credit score by 13 points, but the score increase will be limited to Experian — it won’t reflect on the two other credit bureaus.
  • Avoid closing unused lines of credit. An opened and unused line of credit won’t count against you, but if you close it you’re lowering your available credit, which can also cause your credit utilization ratio to rise above the 30% threshold.

The final word

As you can see, your credit score and mortgage rates you’ll receive from lenders are closely related. You can potentially save thousands of dollars in interest on a mortgage by raising your credit score. This might be the easiest savings weapon in your arsenal when applying for a mortgage — especially if you take the time to get your credit in order before applying. 

Anyone can take advantage of the steps above that are known to boost your credit score over time — just don’t wait to implement the changes recommended above or it could be too late for the savings to line up.

Steve Walters

Contributing Finance Writer

An avid traveller and hiker, Steve has been writing in the personal finance, investing, and blockchain spaces for nearly a decade. His writing has been featured on The Simple Dollar, Financial Samurai, Free Money Finance, Coin Bureau, and a number of other personal finance and investing sites.