How Your Credit Score Affects Your Mortgage Rate
How Much Can I Borrow With a 700 Credit Score?
A high credit score is your golden ticket to a low-interest rate home loan. So if you are among the nearly 58% of Americans with a FICO credit score above 700, your borrowing power is strong. However, how much you can borrow with a 700 or higher credit score depends on additional factors, including your debt-to-income ratio and the appraised value of the property you intend to purchase versus the sale price. So a 700 or above credit score on its own isn’t enough to qualify for a blank check from a lender.
Conversely, if you have a low credit score, it means you’ll pay more interest, or worse, have your loan application denied outright.
Why is your credit score so important? It measures your risk factor and lets lenders know how likely you are to pay them back. No organization wants to lend money if it won’t be paid back on time, in full and with interest.
What Affects Your Credit Score?
What goes into creating your credit score? There are a number of factors that the three major credit report agencies (Experian, TransUnion and Equifax) cull from your current and past credit payment history.
All three credit reporting agencies pull your data, apply a weighted formula and determine a FICO credit score for you that is provided to lenders.
What factors comprise your credit score? Repayment history, credit balance, the number of available lines of credit you have, the age of your credit lines and the types of credit lines you have (loans, credit cards, etc.), plus, there can be other factors that can impact your score, such as credit report errors and checking your credit score the wrong way. Yep, checking your score actually has a negative effect on it, unless you use a tip that we’ll discuss later.
How Your Credit Score Affects Buying a House
What is borrowing like for those with credit scores above 700? Well, pretty dang good. You get low rates that can save you tens of thousands of dollars over the life of a 30-year home loan.
If you build your credit score up and above 720, you’ll tend to get a lender’s best rates. Those are the ones that are often advertised in car commercials and bank posters with a really attractive number and a tiny asterisk next to it. That asterisk is typically tied to a disclaimer that says “on approved credit.” What that’s really saying is, with a high credit score, often above 720.
On the flip side, if you have a credit score of 680, your rates start to slide to the less favorable side.
If you pay close attention, you’ll notice that credit-score-based offers are typically segmented by 20-point chunks. So the interest rate you get at 680 is a little less than the rate at 660. There’s no hard science determining why this is the case, it’s just how lenders tend to arrange their offers. So every 20-point credit score change can make a big difference when borrowing.
100-Point Credit Score Impact on Interest Rate
If a 20-point credit score swing changes things a little bit, you can bet that a 100-point difference changes things a lot. Although, the magnitude of the change may not seem obvious at first.
Say for example you have a credit score of 740. For simplicity’s sake, let’s assume that earns you an interest rate of 4% on a $250,000 home. Including other factors such as mortgage insurance, taxes and down payment, you’d have a monthly payment of roughly $1,500.
Now, let’s change the equation and give you a credit score of 640. That would likely increase your rate to 4.5%. No biggie, right? Well, in the same scenario, your monthly payment is now roughly $1,600. Okay, a hundred dollars difference is a lot, but it’s not going to break the bank. Or does it?
When you factor that $100 difference over a 30-year loan, you’d be paying $36,000 more for the exact same home, all because your credit score was 100 points lower.
Government Mortgage Rates by Credit Score
If you don’t have a strong credit score, it’s okay. You’re not out of luck. You can always turn to Uncle Sam.
The Department of Veterans Affairs, The Department of Housing and Urban Development and the Department of Agriculture all offer home loan programs for people with lower credit scores.
- FHA Loan: As low as 500 credit score.
- VA Loan: Some as low as 580, most start at 620 credit score.
- USDA Loan: 620 credit score is recommended.
Keep in mind, those are typical credit score requirements. However, lenders are allowed to place their own terms and requirements on a program. These are called “overlays” and are set by each lender. So if you fail to meet the requirement of one lender, it’s worth exploring other lenders to see if they have different overlays. This is why it is wise to work with a personal loan officer that can help you identify your options.
Know Your Credit Score for the Best Mortgage Rate
When it comes to getting approval for a home loan, it doesn’t matter if you are a kind person. It doesn’t matter if you shake the loan officer’s hand. It doesn’t even matter if you dress up to visit their office. The single determining factor is your credit score. That may seem cold, but it’s understandable.
You are asking for a lot of money and a lender needs to know how reliable you are paying off debt. That said, there are ways you can go about completing your application that can put you in the best position possible.
There are also certain loan programs that will give you a better chance at qualifying. The best way to understand how to go about this process is to work with a personal loan officer. They can take you through the process, tell you what to expect, how to fill in certain information and give you the best chance at getting a great loan.