Most lenders have carved-in-stone rules about handing out the best terms, and those rules almost always place a major emphasis on your credit score. The best rates are usually offered to those with a credit score of 740 or higher. Rates will still be favorable for those borrowers with a score of 700. But if your score is a 698, those two points could cost you thousands of dollars.
According to MyFICO.com, the consumer website of popular scoring model FICO, the interest rate difference between those two scores is about one-third of a percentage point.
On a $165,000 30-year fixed-rate mortgage, that difference could cost you more than $13,378 in interest charges, assuming a 4.5 percent interest rate with a 700 credit score and a 4.875 percent rate on a 698 score. Fall below a 660 and the rate goes up even more, if you can even get approved for a mortgage at all.
Keep in mind that these are averages. Most lenders today practice tiered pricing, with interest rates rising as scores go down. Each lender chooses its own "break points" between tiers. Lender A may bump up the interest rate if a score falls below 700, while Lender B doesn't charge higher rates until the score is 690 or below. So if you stick with one lender, and that lender's break point is 700, raising your score from 698 to 701 can be vital.
This underscores the importance of not only doing all you can to improve your score, but shopping thoroughly when looking for a mortgage. From the perspective of a mortgage broker, who can choose among a sea of many lenders, there are no sharp break points. Consumers should do what a good broker does -- look for a lender that offers the best rate for a specific score.
But that's jumping ahead of ourselves. First things first: You can take steps to improve your credit score. The number of variables that play into an individual score make it impossible to say that one particular action will increase a given score by a certain number of points. But there are some good guidelines.
"The key to having the best FICO score possible is following three rules," says Anthony Sprauve, senior consumer credit specialist for FICO. Pay all your bills on time every time. Keep your credit card balances low (less than 30 percent of your available credit) and only open new credit when you need it, he says.
That's good advice, to be sure, but these actions take a long time. What if you're house hunting and you just need a few extra points to bump you over the line to the great rates?
Start by pulling your credit report and your FICO score to see where you are. If you don't want to pay for your FICO score just yet, you can get a free credit score from one of the legitimate credit scoring sites such as Credit Sesame. If your score is above a 760, you're golden. Improving your score from 760 to 800 won't get you better terms.