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.