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How Your Credit Score Affects Your Mortgage Rate Offers

Published on: March 9, 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 a mortgage?

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 and may charge a higher interest rate in case you default on your loan.

Typically, lenders consider borrowers with a higher credit score as being less risky, so they tend to offer lower rates.

How do average mortgage rates vary by credit score?

Mortgage rates based on your credit score are just one piece of the lending puzzle, but understanding how a lower credit score might affect your interest rate puts things into clearer focus. To illustrate this point, the Consumer Financial Protection Bureau (CFPB) has a tool that shows a sample range of mortgage rates based on FICO scores.

Let’s say you make a 10%, or $45,000, down payment on a $450,000 home in Colorado and apply for a 30-year conventional loan of $405,000. The table below lists sample mortgage rates for four different FICO score ranges, based on estimates from the CFPB tool as of March 7, 2022.

Credit score  Interest rate*  
620-639  4.875% 
660-679  4.625% 
720-739  4.125% 
800-819  4.00% 

* Median rate offered for credit score range as of March 7, 2022, as 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.

Using our amortization calculator to crunch numbers, here’s a look at how much homebuyers in each credit score category would pay for our sample $405,000 home loan over 30 years: 

  • Fair (620-639): $2,147 per month, $366,587 total interest.
  • Good (660-679): $2,082 per month, $344,613 total interest.
  • Very good (740-759): $1,963 per month, $301,620 total interest.
  • Exceptional (800-819): $1,934, $291,072 total interest.

Over the life of this loan, borrowers with an “exceptional” credit score save $75,515 in lifetime interest payments compared to borrowers with a “fair” credit score. Keep in mind that the monthly mortgage payment examples above include principal and interest only. Additionally, you’ll pay for property taxes, homeowners insurance, and private mortgage insurance, or PMI, which will increase your total monthly mortgage payment.

Use our mortgage calculator to see how different interest rates affect your monthly mortgage payments.

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 loans. 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 loans. 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 loans. You might qualify for an FHA loan with a credit score of 580 or higher, with a down payment as low as 3.5% of the loan amount.

USDA loans. If you plan to buy in a rural area, you may qualify for a loan guaranteed by the U.S. Department of Agriculture (USDA). While the USDA doesn’t set a minimum credit score, many lenders prefer 620 or higher. USDA loans also have household income limits.

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

Freddie Mac Home Possible®. 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.

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 may have higher borrowing costs or be limited in other ways. For example, FHA loans where you’ve put less than 10% down require upfront and annual mortgage insurance premiums for the life of the loan, which adds up. USDA loans are available only in rural areas and have household income limits.

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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