When you’re applying for a mortgage, your credit score has the most meaningful impact on the rates you’ll be offered. Typically, the higher your score, the lower the interest rates you’ll be offered by lenders.
“Credit scores are enormously influential in the mortgage process and they have been since the [Federal Housing Finance Agency] essentially forced the mortgage world to start using them in the late 90s,” says John Ulzheimer, author of “The Smart Consumer’s Guide to Good Credit.” Ulzheimer says credit scores are “as important as a solid appraisal and having sufficient income.”
Check your score for free to see where you stand.
What score will get the best rates?
Most credit scores use the Fair Isaac Corporation (FICO) model, which grades consumers on a 300- to 850-point range, with a higher score indicating lower to risk to the lender. Generally, a score of around 750 or higher on the FICO scale is considered an excellent score.
“I’ve talked to people who are keenly aware of their score but are hard-pressed to tell me what that means in terms of what they qualify for,” says Bruce McClary, spokesman for the non-profit National Foundation for Credit Counseling.
Although it’s up to the specific lender to determine what score a borrower needs to be offered the lowest interest rates, the difference of a few points on your credit score can affect how much your monthly payments would be by hundreds of dollars.
“The good news is there are published interest rates for people who have scores as low as 620, which is about 80 points below the national average,” says Ulzheimer. Use a loan comparison calculator to see how much of a financial impact a loan at varying interest rate points can have on your monthly costs.
For example, a 30-year $200,000 loan at a 4 percent interest rate without any other fees would mean you’d have monthly payments of approximately $954.83. But take out a 30-year $200,000 loan at a 5 percent interest rate and your monthly payments will jump up to $1073.64. Raise that interest rate to 8 percent, and you’re looking at $1,467.53 every month.
Boost your score
If your credit score isn’t great, there are still options. Instead of just settling for the mortgage rates you’re currently qualified for, there are steps you can take to help to revive your score and improve your options.
Most importantly, get a copy of your credit report and review it carefully for any errors. Sometimes simply correcting mistakes can help improve your score.
McClary also advises that as you start shopping around for a mortgage, you hold off on opening any new lines of credit.
“With a lot of inquiries, the combined effect could be enough to bring your score down. Even a small drop in your credit score could have an impact on the rates you’re qualified for,” says McClary.
If you decide to do some rate-shopping, try to compare lenders within 30 days of when you think you’re ready to pull the trigger on a loan. According to FICO, they won’t count against your score any mortgage or auto loan inquiries made within 30 days of when they generate a credit report for a lender.