Mortgage RatesHow Does My Credit Score Affect My Mortgage?

How Does My Credit Score Affect My Mortgage?

If you want to buy a home, you will likely be applying for a mortgage. The terms of your home loan will affect the financial decisions you make for many years – potentially decades. Your mortgage payments are often the most significant expense in a household’s budget. Therefore, it is essential that you get a headstart when applying for a loan.

The mortgage underwriter considers many elements when evaluating your loan application: your current debt, employment history, savings, income, and, most importantly, your credit score. A higher credit score proves that you can repay debt, showing mortgage lenders that you are less risky and more trustworthy. Having a good or even excellent credit score also gives you access to more advantageous interest rates and better terms. On the other hand, a low credit score could lead to the lender rejecting your loan application even if you can show proof of regular income. Or, the lender may require a co-signer before approving your mortgage.

Access to Better Interest Rates

The main argument favoring a higher credit is that it gives you access to more favorable interest rates. A low interest rate means lower monthly payments, freeing room in your budget for other homeownership expenses, such as maintenance, taxes, or homeowner’s insurance. You also avoid becoming “house poor” with lower monthly payments since you will more easily afford your living expenses.

A better interest rate can also improve your buying power since you will pay less in interest and put more toward the down payment. House hunters are often surprised that they can lower their interest rates by 0.25% or 0.5% by increasing their credit score. Some may even hesitate to put in the time and effort to improve their credit score for a good mortgage rate. A quarter or a half-point difference may not look like much on paper. However, it could represent tens of thousands of dollars in interest throughout the life of the loan.

Better Equity in Your Home

In addition, a higher interest rate also means that it will take longer to pay off the principal of the mortgage since, with amortization, the majority of your monthly payment goes toward interest at the beginning of your loan term.

If you are like most Americans, it is unlikely that you will stay in the same property until the loan is paid off. In 2018, the median duration of homeownership in the United States was 13 years. This number was reduced by half in many of the largest metro areas, especially in the South and West.

Most people move – either to relocate to a different city or to find a more suitable property for their lifestyle – before paying off their mortgage. If you have a lower interest rate, you can build up the equity in your home faster and reduce the principal balance you owe. In other words, when you sell your property, you will have more cash left in your pocket to buy a new home after paying off the existing mortgage.

FAQ about Mortgage Rates and Credit Score

What to do before a credit check?

If you are thinking about buying a house, your first step should be to check your credit score and if you would qualify for a good interest rate. If your credit score is lower than you would like, it’d be vital to work on improving your credit score right away before applying for a loan. Here are some of the steps you can take to improve your score before a credit check:

  • Check your credit score yourself early on to avoid last-minute surprises. This gives you time to fix your score or identify and correct any errors.
  • Pay all your bills, including rent, car loans, credit card balance, etc., on time and in full.
  • Pay off debt to lower your debt-to-income ratio – most lenders prefer that the balance on your credit card be less than 30% of the available credit.
  • Avoid opening new lines of credit. For instance, you should delay getting a new car if you are planning to buy a house.
  • Although paying off your debt is good, do not close old accounts, even if they have a zero balance. It’ll help with your credit score if you have a mix of credit accounts.
  • As tempting as it may be, avoid checking your credit score too often since credit inquiries may cause your score to take a hit.

What if my credit score improves before closing?

You have put time and effort into improving your credit score. Unfortunately, by the time you get some positive results, you have already applied – and been approved – for a loan. Now what? 

Most mortgage lenders will pull your credit score at least twice throughout the application process. The first credit report takes place when you submit your mortgage application and will determine your mortgage eligibility and the interest rate you can qualify for. However, the report is only valid for 120 days, and the lenders may pull your credit score again if the mortgage takes longer to close. Your credit report will be checked again during the underwriting process before closing.

You may benefit from a higher credit score as long as you did not lock in your rate.

What credit score gets you the best mortgage rate?

The credit requirements for a better mortgage vary depending on the lender. Therefore, it is essential to shop around for a loan provider. However, most financial institutions prefer borrowers with a credit score of 620 or more for a conventional loan. Credit scores above 670 are considered “good” and “very good” above 740. As your credit score gets higher, you are more likely to qualify for better interest rates.

Borrowers with lower credit scores may still be able to qualify for a loan. For example, FHA loans may accept applicants with a score as low as 500. However, these loans often have more requirements, such as higher down payments and interest rates.

Ready to buy? Check today’s rates and find out if you qualify for a loan now.

Alix Barnaud

After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.