Financial Education

How can your credit score impact your mortgage rate

Your credit score may greatly impact the interest rate you qualify for. This article covers how to improve it and what factors influence your mortgage rates.


Credit score and mortgage rate: understand how they relate

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Learn how can your credit score impact your mortgage rate! Source: Adobe Stock

Your credit score is a major factor in getting a mortgage. Lenders use your credit score to determine how risky it is to lend you money, affecting the offers you’ll get.

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This article will teach you how credit score and mortgage rate relate. Also, the best tips to help you improve your credit score. Read on for more information!

What is a credit score and why is it important when getting a mortgage?

A credit score is a three-digit number that will determine your creditworthiness. It is the most important measure of your financial life.

It ranges from 300 to 850, and it’s affected by your payment history, credit usage, length of credit history, recent activity, and the types of accounts you have.

Nowadays, there are three major credit bureaus in the U.S.: Equifax, Experian, and TransUnion. They collect, analyze, and report customers’ financial information.

Moreover, there are multiple scoring models currently in the market, but the FICO score is the most used. It is based on the following model:

  • 300 to 579 means poor;
  • 580 to 669 stands for fair;
  • 670 to 739 is good;
  • 740 to 799 for very good;
  • 800 to 850 stands for exceptional.

As obvious as it might seem, the higher your credit score is, the better you’ll look to potential lenders. It will help you qualify for a mortgage and define the conditions you’ll get.

Borrowers with a higher score will appear trustworthy and more likely to make their payments on time. After all, if you lend money to someone, trust is essential.

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How does your credit score affect your mortgage rate?

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Understand how credit scores and mortgage rates relate! Source: Adobe Stock

No specific credit score will make you instantly qualify for a mortgage. However, most lenders will set a minimum score requirement for applicants.

Conventional and VA loans require a credit score of 620. FHA usually asks for a minimum of 500 to 580, with a 3.5% to 10% down payment.

USDA requires a 640 credit score, and Jumbo Loans have a minimum requirement of 700.

The minimum requirements, in most cases, will get you to qualify for the different mortgage types. Nevertheless, a higher score will ensure you save money on interest in the long term.

When you apply for a mortgage, 100 points on your credit score can determine whether you get a 4% or a 4.5% rate.

You might think the 4% and 4.5% rates will not greatly impact your payments.

But when we’re talking about a 30-year term fixed-rate mortgage of $240,000, it means a difference of $62 on your monthly payments.

Considering this difference in the long term, with a 4.5% rate, you would be paying an additional $22.320 over 30 years.

We all agree that this amount could be great for any purpose you want rather than spending on interest.

Besides getting better rates, a higher credit score will help you qualify for lower monthly payments, down payments, and fees.

In brief, if you want to guarantee you’ll look good to potential lenders, stay on top of your credit score.

This way, you’ll qualify for better mortgage conditions and get to save your hard-earned money.

Ways to improve your credit score before applying for a mortgage

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Start improving your credit score to qualify for better mortgage rates! Source: Adobe Stock

Now that you know why your credit score is so important for your mortgage rates and how it can determine your mortgage rates, you can start working on your score.

Whether you have a good or bad credit score, improving it can help you get better rates.

So before applying for a new mortgage, take a look at the following tips to improve your score! Let’s get started.

Always review your credit report

Before applying for a mortgage, check your credit report to look for any errors. Look for any inaccurate information that can potentially hurt your score.

You can check your credit report for free once a year at the website. Through it, you can review the Equifax, Experian, and Transunion credit reports. 

If you find any missing information or error, you can file a dispute with the reporting agency and the creditor. It will help you ensure you can repair your credit score.

Make your payments on time

Your payments greatly impact your credit history, so remember to stay on top of your it to avoid any missed or late payment reports.

As previously said, your credit score will show lenders whether you’re creditworthy, also, how likely you are to pay back your debts.

So the better your payment history, the better borrower you’ll look.

Keep on 30% credit utilization

Credit utilization is a major factor in defining your credit score. It refers to the amount of debt you have used compared to your available credit limit.

Lenders usually look for applicants with a 30% credit utilization ratio. You can calculate this percentage by dividing the amount of debt into the available credit.

Bottom line

As you can see, your credit score is a major factor in lenders’ decisions. Having a good score can be decisive if you want to get better mortgage rates, down payments, and fees.

In brief, before applying for a mortgage loan, take your time and work on improving your credit score!

This way, you’ll ensure you qualify for lower interest rates and save money in the long term.

If you want to learn more about your credit score, we have the perfect article to help you!

Read the following post and deeply dive into what a credit score is, what it means to your financial life, and more!  

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About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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