How Your Credit Score Affects Your Mortgage Rate

Does my credit score impact how much money I can borrow?

A high credit score is your golden ticket to the best rate available on your home loan, which does impact the monthly payment and therefore does impact how much you can borrow. So if you are among the nearly 46% of Americans with a FICO credit score above 740, your borrowing power is strong. However, how much you can borrow with a 740 or higher credit score depends on additional factors, including your debt-to-income ratio, the type of loan you are using and the appraised value of the property you intend to purchase versus the sale price. So a 740 or above credit score on its own isn’t enough to qualify for a blank check from a lender.

Conversely, if you have a credit score lower than 680, it means you’ll have less options for your type of loan, you will pay higher interest rates, may need higher down payment or worse, have your loan application denied outright.

Why is your credit score so important? It measures your risk factor -it tells a story about your willingness to repay debts you have- and lets lenders know how likely you are to pay them back. No organization wants to lend money if it won’t be paid back on time, in full and with interest.

What Affects Your Credit Score?

What goes into creating your credit score? There are a number of factors that the three major credit report agencies (Experian, TransUnion and Equifax) consider from your current and past credit payment history in order to assign you a credit score. Your lender will review your full credit report as well as the score itself.

All three credit reporting agencies pull your data, apply a weighted formula and determine a FICO credit score for you that is provided to lenders.

What factors comprise your credit score? Repayment history, current debt owed, credit lines balance compared to limits, total outstanding debt, the number of available lines of credit you have, the age of your credit lines and the types of credit lines you have (loans, credit cards, etc.) and your credit history overall. There can be other factors that can impact your score as well, such as credit report errors and applying for credit too often. Yep, checking your score actually has a negative effect on it, unless you use a tip that we’ll discuss later.

How Your Credit Score Affects Buying a House

What is borrowing like for those with credit scores above 700? Well, pretty dang good. You get lower rates that can save you tens of thousands of dollars over the life of a 30-year home loan.

If you build your credit score up to 740 or higher, you’ll tend to get a lender’s best rates. Those are the ones that are often advertised in car commercials and bank posters with a really attractive number and a tiny asterisk next to it. That asterisk is typically tied to a disclaimer that says “on approved credit.” What that’s really saying is, with a high credit score, often above 720.

On the flip side, if you have a credit score of 680 or below, your rates start to slide to the less favorable side and your mortgage insurance premiums (if applicable) also increase. Another place you may see a change in premiums related to homebuyer costs based on credit rating is homeowners insurance; many insurance companies have risk based pricing.

Government Mortgage Rates by Credit Score

If you don’t have a strong credit score, it’s okay. You’re not out of luck. You can always turn to Uncle Sam.

The Department of Veterans Affairs (VA), The Department of Housing and Urban Development (FHA) and the United States Department of Agriculture (USDA) all offer home loan programs with more flexible credit requirements:

• FHA Loan: Minimum 580 credit score.
• VA Loan: No set minimum credit score, reviewed based on risk.
• USDA Loan: Minimum 580 credit score.

Keep in mind, those are typical credit score requirements. However, lenders are allowed to place their own terms and requirements on a program. These are called “overlays” and are set by each lender, they can be more strict that what the investor requires. This is why it is wise to work with a personal loan officer that can help you identify your options.

Know Your Credit Score for the Best Mortgage Rate

When it comes to getting an approval for a home loan your credit score and history are two of the main components in determining your risk level and ability to borrower. You are asking for a lot of money and a lender needs to know how reliable you are at paying off debt. It is good practice to have an idea of your credit stands at least once a year, maybe even once a quarter. You can check your credit for free at annualcreditreport.com to get an idea of what is showing on your credit, it won’t give you a score for free but it will give a comprehensive picture of the report. Connecting with a loan officer before you are ready to start searching for homes is also advisable, this way if anything does show up on your credit there is time to outline and implement a plan.

The best way to understand how to go about the processes outlined above is to work with a personal loan officer. They can take you through the process, tell you what to expect, how to fill in certain information and give you the best chance at getting a great loan. Want to get started now? Complete our Quick Start Form and we’ll connect you with a loan officer that matches your specific needs. They’ll provide a free consultation and guide you through every step of the loan application process.