Your credit score is one of the most important factors when applying for a mortgage. It influences your monthly mortgage payment, the total amount of interest you pay on your mortgage loan, and ultimately the total amount you pay for your home. Because your interest rate is based on your credit score, you should make sure your credit is in the best shape possible before applying for a mortgage.
Key Takeaways
- Your credit score impacts your interest rate, so try to make sure it's in the best possible shape before you apply for a mortgage.
- A lower credit score indicates higher risk, so the riskier you are to a lender, the higher your interest rates will be.
- Having a higher credit score could save you tens of thousands of dollars over the life of your mortgage.
How Your Mortgage Rate Is Set
Interest rates are set partly based on your riskiness as a borrower. The riskier you are to a lender, the higher your interest rates will be. Mortgage lenders use credit scores to determine whether you qualify for the mortgage and to determine risk and the likelihood that you will default on your mortgage loan. The higher your credit score, the lower the risk that you’ll default on your loan, and the lower the interest rate you’ll qualify for.
A high credit score demonstrates responsibility with your previous credit obligations. You’ve made your payments on time, you’ve kept your balances low, and you’ve avoided major credit blunders like debt collections and charge-offs.
A low credit score, on the other hand, is the result of falling behind on credit card payments, keeping high balances, and perhaps having major delinquencies on your credit record.
This chart illustrates the relationship between credit scores and interest rates, and how one impacts the other:
How Credit Scores Affect Mortgage Rates
A loan savings calculator, such as the one offered by myFICO, can demonstrate the impact of credit scores on mortgage rates. Enter your state, mortgage amount, and credit score range, and get an idea of what your mortgage terms would be. Such calculators provide only estimates. Your mortgage lender can give you exact terms after reviewing your complete financial details and down payment.
Enter a $200,000 principal on a 30-year fixed-rate loan, and your credit score ranges, mortgage rates, and overall costs, might look something like this (as of July 2022):
- 760 to 850: APR of 5.132% with a monthly payment of $1,090. The total interest paid on the mortgage would be $192,341.
- 700 to 759: APR of 5.354% with a monthly payment of $1,117. The total interest paid on the mortgage would be $202,237.
- 680 to 699: APR of 5.531% with a monthly payment of $1,139. The total interest paid on the mortgage would be $210,210.
- 660 to 679: APR of 5.745% with a monthly payment of $1,167. The total interest paid on the mortgage would be $219,944.
- 640 to 659: APR of 6.175% with a monthly payment of $1,222. The total interest paid on the mortgage would be $239,810.
- 620 to 639: APR of 6.721% with a monthly payment of $1,293. The total interest paid on the mortgage would be $265,604.
As you can tell, the interest rate, monthly payment, and total interest paid all increase as credit scores go down. The difference between getting a mortgage with a 620 credit score and a 760 credit score boils down to $203 per month on your mortgage payments and $73,263 on the total interest paid over the life of the mortgage.
Note
You can experiment with your own numbers, including down payment amount, loan term, and property taxes, using our mortgage payments calculator.
Checking Your Credit Score
You should check your credit score well before you begin the mortgage process so you will know where you stand and the mortgage rate you could qualify for. You can check your credit score for free through several online services. Many banks, credit unions, and credit card providers offer credit scores as a regular feature. Since most major mortgage lenders use your credit score in their decision, it's worthwhile to obtain all three of your credit bureau reports to make sure the information on your record is accurate.
It's a good idea to research your credit score and your credit reports well in advance of making a major purchase so you have time to address any errors or other issues you might discover.
Qualifying for a Lower Mortgage Rate
It may be helpful to improve your credit score before applying for a mortgage so you can qualify for a lower mortgage rate and save tens of thousands of dollars over the life of the mortgage. The money you save on your mortgage is well worth the time and effort to improve your credit score.
If you have a low credit score, review your credit reports to see the items that are affecting your credit score. You can raise your credit score by making timely payments on all your bills, paying down your credit card debt, removing errors from your credit report, and paying off outstanding delinquent balances. In some cases, just a few points can make a big difference in your mortgage rate.
Continue to monitor your credit score in the weeks leading up to your mortgage application to see how your credit score improves.
Frequently Asked Questions (FAQs)
What is a good mortgage rate?
Mortgage rates change based on economic conditions, so a good mortgage rate now may not be the same as a good mortgage rate one year or five years from now. Published mortgage rates are typically based on an applicant with an excellent credit score, so they may not apply to you if your credit score isn't high. To find a good mortgage rate for you, get quotes from at least a few lenders so you can compare them and get a sense of what's available.
How are mortgage rates determined?
In general, mortgage rates are determined by economic factors. These include the Federal Reserve benchmark interest rates and the job market. Mortgage rates aren't directly tied to Fed rates, but they tend to trend in the same direction. If the job market is poor and fewer people are working, rates will drop to attract buyers.
Lenders then look at factors like credit score and history, income, and total debts to determine what mortgage rate to offer specific borrowers.
