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How Does My Credit Score Affect My Mortgage Rate?

4-minute read

*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

As a consumer, you know just how important your credit score is in landing you the best credit card offers, car loans and making you an attractive potential tenant. But how can it affect how much your mortgage costs you? Here’s why your credit score makes a difference when shopping around for a home loan.

Why Does My Credit Score Matter To Mortgage Lenders?

Creditors and lenders use scoring models to determine your creditworthiness when extending a home loan. While a credit score is based on your credit history and is made up of different parts (mix of credit payment history, use of credit, length of credit history and new credit), it ultimately boils down to how reliable you are with paying back your loans. Hence, why your credit score matters. The higher your credit score, the better.
 
Mortgage lenders use what’s called risk-based pricing. In other words, the rates and terms of a loan is dependent on how likely you are to default on your payments. If you are deemed a higher risk, you will most likely be offered a loan with a higher interest rate and less favorable terms. On the flip side, if you are determined to be less of a risk, you’ll be given a lower interest rate and more favorable terms.

How Does My Credit Score Affect My Interest Rate?

Because a lower credit score indicates you are a riskier borrower, having a poor credit score could mean higher interest rates. In turn, you’ll be paying more in interest throughout the course of your mortgage. Conversely, a strong credit score leads to lower interest rates, which equates to paying less in interest fees during your mortgage.

What Credit Score Do I Need To Get A Mortgage?

 
While some mortgage types have lower credit requirements to qualify for a conventional loan from Freddie Mac or Fannie Mae (which we’ll get to in just a bit), you’ll typically need a FICO® credit score of at least 620.
 
Note that these are just minimums. Depending on the lender, the score you need could be higher. According to Freddie Mac, it’ll be tough to secure a mortgage with a credit score that’s below 650.
 
Your credit score is just one piece of the pie. Lenders will also look at other factors to assess your financial picture such as your income, employment history, how long you’ve lived at your current residence and your cash flow.

Mortgage Types With Lower Credit Requirements

If your credit score is less than sterling, there are a few types of mortgages with lower credit requirements:

FHA Loan
For first-time home buyers, you only need a credit score of 500 to qualify. However, it’s more likely you’ll qualify for a mortgage with a score of 580 and above. If your credit score is 580 and above, you’ll need to dole out a down payment of at least 3.5%. If your score is below that, you’re looking at a minimum required down payment of at least 10%.
 
HomePossible®
Freddie Mac’s Home Possible® mortgage makes it possible for low or moderate income earners to get qualified for a mortgage with just a 3% down payment. You can be a repeat home buyer to tap into this type of mortgage. While you don’t need credit to qualify, there will be additional requirements to qualify.
 
HomeReady®
Like Freddie Mac’s Home Possible®, the HomeReady® mortgage by Fannie Mae only requires a minimum 3% down payment. While you only need a credit score of 620 to qualify, you’ll want a score of 680 for better loan rates and terms.
 
VA Loans
While the Department of Veterans Affairs doesn’t set credit requirements, most lenders will require a minimum credit score of 620.
 
USDA Loans
While the USDA also doesn’t have a minimum credit requirement, most mortgage lenders will require you to have a minimum credit score of 640.

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Building My Credit Score

Note that even though you might be able to qualify for a mortgage with lower credit, you might not get the best rates or terms. If your credit score isn’t as strong as you’d like to score the most favorable interest rates and terms, here are a few ways on how you can boost your credit score:

Make On-Time Payments On Your Loans
This includes any accounts that show up on your credit report such as revolving credit (credit cards) and installment credit (auto loans, student loans and personal loans). As your payment history makes up a large chunk of your credit score at 35%, you’ll need to make on-time payments a priority.
 
If you have problems forgetting, set up automatic reminders. If you’re also having trouble keeping up with your payments, reach out to the creditor or lender to see if they can move the date of your monthly payment cycle so they’re more in sync with your paychecks.

Don’t Hit Your Credit Limit
Getting close to maxing out on your credit card limits will ding your credit. It’s what’s known as credit usage or credit utilization. Expressed as a percentage, credit usage is the balance you’re carrying against the limit of your total cards.

A general rule of thumb is to try to keep your credit usage to 30% or under. So if the limit on all your cards is $100,000, ideally your total balance on all your cards should be no higher than $30,000.

Have A Long Credit History
The longer your accounts stay open, the better your credit. You might want to consider keeping some older credit cards active lest they might negatively impact your credit.

Check Your Credit
Errors on your credit score can cost you and could make it more challenging for you to qualify for a loan. Check your credit report on the regular and review it for errors.

You can order a credit report for free from each of the three major consumer credit bureaus (TransUnion®, Equifax and Experian) every 12 months from AnnualCreditReport.com. You can also check your credit score on Rocket HQSM.

Buying a house is one of — if not the largest — and most important purchases you’ll make in your adult life. It’s important to see how your credit score affects your mortgage rates, which affects the total cost of the home. By having a greater understanding of the relationship between credit scores and home loan rates as well as working toward building your credit, you can help yourself get approved a home loan with the lowest interest rates and most favorable terms. In turn, this could save you big-time.

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