There’s no doubt that a strong credit score makes it easier to secure a mortgage with favorable terms when buying a house. The higher your credit score, the lower you can expect your interest rates to be, which can translate to significant savings over the life of your loan. A damaged credit score, on the other hand, can lead to higher interest rates, and make it difficult to qualify for certain types of loans without repairing credit first. Understanding how credit scores impact your interest rate is an important step in securing a mortgage for your next home.
- Risk-Based Pricing Highlights Importance of Credit Scores
The mortgage industry is largely based on risk-based pricing, which means that the cost of your loan goes up based on your level of credit risk based on the lender’s calculations. Credit scores range from 300 to 850, and to qualify for a conventional mortgage you’ll typically need a score of at least 620. Where your score lands between 620 and 850 has a big impact on your interest rate, so it’s worth keeping your credit history as clean as possible. - What’s a “Good” Credit Score and How Do You Learn Yours?
While standards vary between lenders, most agree that a “good” credit score checks in at 670 or above. Unsure of your credit score? You can request a free copy of your credit report once per year, allowing you to see your three major credit scores. After the first annual report for each bureau, additional reports in the same year require a fee. HUD-approved housing counselors can also provide you with a free report, and help you review it. - How Lenders Use Credit Scores to Calculate Interest Rates
Higher credit scores lead to lower interest rates, and lower credit scores lead to higher interest rates. A higher score increases the lender’s confidence that you’ll make payments on time, while a lower score presents increased risk to the lender. The difference between a 620 and 750 credit score could lead to a half-percent increase in rate, which may not sound like much but ultimately makes a big difference. - A Small Change in Rates Makes a Big Difference Over Time
Even a change of half a percent in your mortgage rate can ultimately make a major impact over the life of your loan, and the potential exists for even larger gaps in interest rates based on credit score. That half-percent difference, over the life of a 30-year mortgage, could add more than $20,000 to the total cost of the loan. - How to Repair a Damaged Credit Score
If your credit score could use some work, the ideal time to start is before you start shopping for a loan. Make all payments on time, resolve old debts, and review your credit report to look for inaccuracies. If there are inaccuracies in your report, resolve them with the relevant credit agency. - Protecting a Strong Credit Score Before Buying a House
If your credit is already in great shape, make sure you don’t do anything to lower it before shopping for a mortgage. That means it’s best to put off big purchases and new lines of credit until after you’re done buying a house.
While your credit score impacts many facets of the mortgage process, the biggest key is in how it affects your interest rates. A higher credit score ultimately means lower interest rates, and that’s a big win financially long-term when buying a house. Even if your credit has seen better days, there’s plenty you can do to get your score in shape before pursuing a mortgage.
