mortgage

How credit scores impact your mortgage rate

Interest paid on a mortgage can add up to hundreds of thousands of dollars over the life of the loan. The most influential determinant of your mortgage rate will be your credit score. The higher your score, the lower the interest rate. On a loan as large as a mortgage, a mere percentage point up or down can add up to a significant amount of money.

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Not only are credit scores more vital than ever when it comes to getting a good rate on a home loan, but they will influence whether you can even get a loan at all.

Credit is so tight and lenders are so skittish that buyers below a certain threshold, typically a FICO score of 620, have a better chance of striking oil in their bathtub than securing a mortgage. It's possible, but will require some digging.

Standards have not always been so restrictive; the industry has changed in recent years.

"It's changed twofold: First there is a minimum score that you need to have to even be considered for a mortgage regardless of compensating factors such as your income and your assets. And unless you have top-tier credit, you're not going to qualify for the best programs, terms and conditions," says Louis Spagnuolo, vice president of mortgage banking at WCS Lending in Boca Raton, Fla.

Though the tiers go up all the way to 850 on the FICO scale, a score of 740 or more should qualify for the best mortgage rates from most lenders. Depending on the lender, the mortgage rates offered to the highest and lowest credit tiers can vary as much as a full percentage point and a half, says Spagnuolo.

The myFICO.com Web site illustrates the variation in loan pricing across the tiers of credit. The difference in the monthly payment for a $300,000 loan between the highest and lowest scores is nearly $300, which over 30 years adds up to more than $100,000. That's money better invested in your retirement account than spent in servicing a home loan.

What lenders look for

In general, investors demand higher yields from risky investments. This applies in the mortgage lending arena. Lenders assign you a rate that matches the gamble they're taking in lending you money.

Lenders prefer borrowers with low balances, a long history of on-time payments and a mix of credit utilization -- for instance, a car loan and a couple of revolving accounts such as credit cards.

"Lenders look at several variables on the credit report: outstanding debt; the outstanding debt relative to the total available debt; the length of the credit history and the pursuit of new credit -- how many inquiries are on your report," says Matt Hackett, underwriting manager at Equity Now, a direct mortgage lender in New York.

Some types of credit may be viewed more negatively than others, particularly if there's not a healthy mix of available credit and loans on your report.

"Store cards are looked on more negatively. Lenders just don't like to see them," Hackett says.

Curtis Arnold of CardRatings.com says that while a store card won't adversely affect your score, if a lender manually looks at your report there may be a subjective view that store cards are less desirable than a major credit card.

"The underwriting is not as strict as a major credit card so they are easier to get. They do have somewhat of a reputation of being cards with lower credit requirements," he says.

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