What mortgage rate can I get with my credit score?
A reader recently asked: “What mortgage rate can I get with my credit score?” So I thought I’d try to clarify a somewhat complicated question.
With mortgage rates no longer at all-time lows (sigh), borrowers looking to refinance a mortgage or purchase a home face an uphill battle.
Today, it’s much more common for your rate to start at 6 or 7 instead of 2 or 3. Although these high rates aren’t bad historically, the speed of change over the past few years has been dramatic.
This contrasts with mortgage rates in the 1980s, which were already high before simply rising.
But no matter where mortgage rates fall, your credit score will play a big role in determining whether you’ll get a good, average, or not-so-good rate.
What you see advertised is not always what you get, and can actually be much higher if you have marginal credit scores.
Conversely, you may be able to score a below-market rate if you have an excellent FICO score.
Let’s explore why that is so you can set the right expectations and avoid any unpleasant surprises when you finally talk to a lender.
Mortgage rates depend on your credit score
- The above infographic should give you an idea of the importance of credit scores
- When it comes to mortgages, a small difference in rate can equate to thousands of dollars
- Someone could get a 0.75% higher rate (or more) based on credit score alone
- So make sure all three of your credit scores are as high as possible before applying!
The above fee is based on actual advertised rates from Zillow’s marketplace for a loan amount of $400,000 at 80% loan-to-value (LTV) for a 30-year fixed term on an owner-occupied single-family residence.
While interest rates are slightly higher today, the same sliding scale rule applies.
These are with Higher credit scores will get the lowest mortgage rates availablewhile those with lower credit scores will have to settle for higher rates.
Note that the interest rate is 0.75% higher for a borrower with a 620 FICO score versus a borrower with a 740+ FICO score. This can equate to a lot of money over time. Mortgages can last a long time, sometimes 30 years!
The only thing that determines the mortgage rate you’ll end up with is your credit rating, though it’s just one of many factors, known as mortgage rate adjustments, used to determine your loan rate.
Besides credit scoring, there is documentation type, property type, occupancy type, loan amount, loan-to-value ratio, and many other things.
Each pricing adjustment is applied primarily on a risk basis. So a borrower with a high-risk loan must pay a higher mortgage rate than a borrower who represents a low risk to the lender.
This is how risk-based pricing works.
Borrowers with lower credit scores represent more risk to the lender (and have to pay more!)
Simply put, the less risk you expose to your mortgage lender, the lower your mortgage rate will be. vice versa.
This is because they can get a higher price for your low-risk home loan when they sell it on the secondary market.
Lenders take into account a number of things to measure risk, as mentioned above.
Using a credit score alone, it’s impossible to tell a potential borrower what they might qualify for without knowing all the other important pieces of the puzzle.
But I will say that your credit score is definitely one of the most important (if not the most important) factors that go into determining your mortgage interest rate.
As I always say, it’s one of the few things you mostly have control over. Pay your bills on time, keep your outstanding balances low, and apply for new credit sparingly.
If you follow these simple tips, your credit score should be strong. It’s not rocket science.
How much does credit score affect your mortgage interest rate?
- There are rate adjustments specifically for credit scores
- They can raise your mortgage rate significantly if you have poor credit
- Modifications grow larger as credit scores decline
- They’re especially impactful if you also get a small down payment
In general, a credit score of 780 or higher should put you in the least risky category (it was 740 and before that 720). So it became more difficult.
If all your other domains unique Your borrowing profile is also in good standing, and you will qualify for a mortgage with the lowest possible interest rate.
Naturally, you’ll need to comparison shop to find this low price as well. He won’t necessarily come looking for you. But you should at least be eligible for the best the bank or lender has to offer.
This lower monthly mortgage payment will allow you to save on interest over the entire term of your mortgage.
As mentioned earlier, credit score can be very important in determining rates because lenders charge huge adjustments if your score is low.
Just look at the chart above from Fannie Mae. If your credit score is 780 or higher, you will only be charged 0.375% (this is not a rate adjustment but rather a pricing multiplication) of 80% of the LTV (20% down payment).
Conversely, if your credit score is between 640 and 659, you will be charged 2.25% in rate adjustments.
For a borrower with a credit score of 650, this may equate to a 0.75% higher interest rate on a 30-year fixed mortgage versus a borrower with a score of 780.
This difference in price could stick with you for years if you keep your mortgage.
This means higher payments month after month for decades, all because you didn’t practice good credit scoring habits.
A good credit score will not only save you money each month and over time, but it will also make qualifying for a mortgage much easier.
For these reasons, your credit score should be your top concern when applying for a mortgage!
What credit score do you need to get the best mortgage rate?
- Most mortgage rate ads you’ll come across include a lot of assumptions (if you read the fine print).
- You’re often required to have a credit score of 740 or higher to get the best rate
- If your credit score isn’t good, expect a higher rate when you get a quote
- Fannie Mae and Freddie Mac now require a FICO score of 780 for their lowest mortgage rates
If you’ve ever seen a mortgage ad on TV or the Internet, the lender assumes you have an excellent credit score.
This could mean a credit score of 720, 740, or perhaps higher. And they use that assumption To produce a suitable mortgage rate in their advertisements.
For example, Wells Fargo’s mortgage rate page contains a disclaimer that states: “This rate assumes a credit score of 740.”
But without that great credit score, your mortgage rate could end up being much higher.
Now that Fannie Mae and Freddie Mac have added new credit scoring levels, those credit score assumptions may rise to 780 for the lowest advertised rates.
In short, aim for over 780 credit scores from now on if you want to qualify for the best rates.
Borrowers with low credit scores may have difficulty getting approved
On the other end of the spectrum, borrowers with credit scores like 660, 640, and 620 will have more difficulty securing a mortgage.
Assuming they are able to get approved for a home loan, they will receive higher interest rates on their mortgage.
Unfortunately, I can’t say you’ll get X or Y mortgage rate if you have a Z credit score, there are too many factors at play at once. A credit score is just one of them, albeit a very important one.
But I can say that your credit score has a huge impact in determining the mortgage rate you will get and whether you will be successful in getting home loan financing to begin with.
It is therefore recommended to check your credit score(s) 3 months or more before applying for a mortgage to know where you stand. And keep monitoring them until you apply.
This doesn’t have to be a chore or even an expense now that many companies offer free credit scores, including major banks and credit card issuers.
For example, many of the banks and credit card companies I deal with offer free results. It is actually interesting to see the variation in results between different companies.
[How to get a mortgage with a low credit score.]Check your credit score more than 90 days before you shop for a mortgage!
- Don’t risk it – check your credit scores more than 3 months in advance
- This lets you know where your credit stands and gives you time to fix things
- It may take months to turn things around if you need to improve your score
- Things like disputes may take 90 days or more to complete and be reflected in your score
- Aim for a FICO score of 780 to qualify for the best mortgage rates
If you don’t know your credit score several months before you apply for a mortgage, you may not have enough time to make any necessary changes.
Trust me, surprises always come when it comes to credit.
An incorrect (or forgotten) late payment can significantly lower your credit score, even if it is reported in error.
This lower score can increase your mortgage rate by a percentage point or more. Yes, credit scores can have that big of an impact!
Disputing errors and/or addressing other credit errors can take several months to complete, so don’t hesitate to check your credit if you think you’ll be applying for a mortgage anytime in the near future.
It’s good to know where you stand at all times, but especially before you apply for a home loan. Don’t just assume you have excellent credit. Check it out!
While you’re here, don’t make too many purchases before applying for a mortgage. This can also sink your score.
The good news is that poor credit scores can be improved. You’re not stuck with them. If your credit score needs some TLC, take the time to improve it instead of settling for a higher rate today.
If your grades are already excellent, don’t forget to shop! Just comparing a few different lenders can be just as important as maintaining good credit.
Read more: What credit score do I need to get a mortgage?
Source link