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How Your Credit Score Affects Your Mortgage Rate Offers

Published on: January 6, 2022

credit score mortgage rates

Your credit score affects the mortgage rates you’ll be eligible for as you’re shopping for a home. Those three digits can have a big impact on the amount of money you’ll pay, not only each month but over the life of your home loan. Calculated from your credit history, your credit score is designed to reflect your creditworthiness.

With a higher credit score, you’ll pay a lower mortgage rate, potentially saving you thousands of dollars in interest payments. With a lower score, you’ll pay a lot more. Understanding the direct impact of your credit score on mortgage rates can help you lower your long-term mortgage borrowing costs.

What is considered a good credit score for lenders?

It’s important to understand what credit score is considered good for a mortgage. Credit scores range from 350 to 850, and ratings vary slightly depending upon which company created the scoring. Typically, a rating of 670 or higher is generally considered good.

FICO scores fall into five ranges, according to myFICO.com:

Less than 580  Poor 
580-669  Fair 
670-739  Good 
740-799  Very good 
800 or higher  Exceptional 

 

Credit scores are based on information in your credit history, such as how much debt you have and your payment history. A lower score indicates you’re less likely to pay back a loan, so lenders consider you a higher risk. To make up for the risk, lenders charge a higher interest rate.

When you have a higher credit score, lenders see you as less risky, so they offer a lower mortgage rate.

How do average mortgage rates vary by credit score?

While mortgage rates based on your credit score depend in part on the lender, the Consumer Financial Protection Bureau has a tool that shows the range of rates that lenders offer based on credit score category.

Here’s how mortgage rates vary based on credit score. The rates in this example are for borrowers putting 10% down on a $300,000 home and applying for a $270,000 30-year conventional mortgage, as of July 2021. Rates may vary depending on when and where you’re shopping for a loan, but this example illustrates how your credit score impacts your mortgage rates.

Credit score  Interest rate*  
620-639  4.063% 
660-679  3.5% 
740-759  2.875% 
800-819  2.875% 

* Median rate offered for credit score range, determined by CFPB.

Even small changes in interest rates can make a big difference in how much you’ll pay for a mortgage, especially over the 30-year life of a loan.

Here’s how much homebuyers in each credit score category would pay for our sample $270,000 mortgage over 30 years: 

  • Fair (629-639): $1,299 per month, $467,640 total.
  • Good (660-679): $1,212 per month, $436,320 total.
  • Very good (740-759): $1,120 per month, $403,200 total.
  • Exceptional (800-819): $1,120 per month, $403,200 total.

Over the life of this loan, buyers with the highest credit score save $64,440 compared to buyers with a “fair” credit score. 

Example payments are for principal and interest only; you would also have to pay taxes and insurance as part of the mortgage payment. Use our mortgage calculator to see how the interest rate affects the payments for a mortgage.

What are my mortgage options with a bad credit score?

If you’re concerned about paying high mortgage rates because of bad credit, there are options beyond conventional loans. While you most likely need a credit score that’s at least in the “good” range to qualify for a traditional mortgage, you may qualify for a government-backed loan with a “fair” or even “poor” credit score.

Government-backed loans are designed for homebuyers who meet specific criteria. They generally accept buyers with lower credit scores than what’s needed for a conventional loan.

Buyers with lower credit scores, incomes, or down payments may qualify for these loans:

VA loan. If you’re active-duty military, a veteran, or an eligible surviving spouse, you may be eligible for a mortgage guaranteed by the U.S. Department of Veterans Affairs, or VA loan. There’s no minimum FICO score for VA mortgages, but many lenders prefer buyers with a credit score of at least 600 or higher.

FHA loan. You might qualify for an FHA loan with a credit score as low as 500, according to FHA guidelines. However, if your score is under 580, you must make a 10% down payment. If your FICO score is 580 or higher, the down payment minimum is 3.5%. Lenders may have higher FHA FICO score minimums.

USDA loan. If you plan to buy in a rural area, you may qualify for a U.S. Department of Agriculture loan. While the USDA doesn’t set a minimum credit score, many lenders prefer 620 or higher.

Fannie Mae HomeReady loan. If you earn less than 80% of the median income in your area, you may qualify for a Fannie Mae HomeReady loan with a minimum credit score of 620.

Freddie Mac Home Possible loan. The Freddie Mac program is also for buyers who learn less than 80% of the local median income, but buyers typically need a credit score of 660 or higher.

Keep in mind that different lenders may have higher (or even lower) credit score minimums than what’s listed above, so it’s important to shop around. While these loans allow you to buy a home with poor credit, they do have some drawbacks. For example, FHA loans where you’ve put less than 10% down require an upfront mortgage insurance premium and annual mortgage insurance premiums for the life of the loan, which adds to your borrowing costs. USDA loans are available only in rural areas.

When shopping for a mortgage, it’s important to consider all aspects of the mortgage, including the impact of your credit score on your overall interest payments.

How to improve your credit score to get a better interest rate 

If you’re concerned about how your credit score will affect your mortgage approval, you can take steps to improve your credit score now. Your score won’t go up overnight, but slow and steady improvements can make a big difference in the interest rate you’re offered once you’re ready to apply for a home loan.

Several factors affect your credit score, including your amount of debt, payment history, and the length of your credit history. You can take actions to improve several of these factors.

Payment history

  • Get current on any missed payments to improve your payment history.
  • Set up automatic payments. That way, your bills are paid on time and you don’t have to keep track of due dates.

Amount of debt

  • Pay a larger amount toward your credit cards each month if you carry a balance. Put more money toward the card with the highest interest rate to try to pay it off first.
  • Keep credit card balances low and limit credit card spending.
  • Pay down any revolving loans you have, such as car loans, student debt, or personal loans.

Length of credit history

  • Don’t take out new credit cards, including store cards, from retailers when you’re shopping for a home loan. New accounts make the average age of your credit accounts shorter, which is a negative.
  • Don’t close any credit card accounts you don’t use. Existing accounts add to your age of credit and also help your ratio of debt to available credit (which you’re trying to improve by paying down debt).

To learn more about your mortgage options based on your credit score, talk to a local Finance of America Mortgage Advisor today.

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