How Does Your Credit Score Impact Your Mortgage Rate?| True Quote Mortgage

How Does Your Credit Score Impact Your Mortgage Rate?

During the mortgage application process, there are more than a few factors that will not only decide whether or not you are approved for a home loan, but will impact the mortgage terms you receive once approved. 

These determining factors include things like your monthly income relative to your monthly debt commitments, the size of your down payment, the person, if any, that you are applying for the home loan with, and your credit score. 

That all-important three-digit figure has a great deal of influence in the mortgage terms that you will receive, so it is important to understand.

What is Your Credit Score

Your credit score is a three-digit number that provides insight into your specific personal finance situation. Essentially, it is a financial grade of sorts that is based on your history of repayment on previous lines of credit; this history is detailed in your credit report.

Credit scores are most often calculated using the FICO (Fair Isaac Corporation) scoring model, hence the name FICO credit score. The credit score range for FICO credit scores goes from 300 on the low end to 850 on the other side. 850 is deemed an excellent credit score, while a 300 is seen as poor.

The credit report that will detail your credit score and history can be pulled from anyone of the three major consumer credit bureaus, those being Equifax, Experian, and TransUnion. Credit reports will detail things like missed or late payments, which will ding your credit score negatively. On the other end, a history of on-time payments that meet the minimum amount needed for that month will improve your credit score.

So, how does your credit score impact your home loan terms?

How Does Your Credit Score Impact Your Mortgage Rate?

For mortgage lenders, they want to be confident that you will be able to payback the money that was loaned to you to purchase your home.

To evaluate your creditworthiness as a mortgage borrower, mortgage lenders will use all information at their disposal.

Your credit score is one of the main things that a mortgage lender will look at when bringing you through the approval process. And if approved, your credit score will also have a massive impact on the mortgage terms you receive, specifically the interest rate.

Usually, a higher credit score will lead to a lower mortgage interest rate and vice versa. There are also a number of things that may impact your mortgage rate outside of your credit score, like the size of your down payment or the current mortgage lending environment.

Yet still, your credit score is going to hold most of the weight in determining what interest rate you will receive on your home loan.

And, myFICO has laid out estimates for what mortgage rate you will receive on a $216,000, 30-year, fixed-rate mortgage depending on your credit score: 

FICO credit score between 760 and 850: 3.33%

FICO credit score between 700 and 759: 3.56%

FICO credit score between 680 and 699: 3.73%

FICO credit score between 660 and 679: 3.95%

FICO credit score between 640 and 659: 4.38%

FICO credit score between 620 and 639: 4.92%

Minimum Credit Score Needed For Each Mortgage Type

Depending on the type of mortgage you are looking into, such as an FHA home loan or a more conventional mortgage loan, the minimum credit score needed for the mortgage will vary.

Although the minimum credit score may change depending on the size of your down payment, the following list includes the minimum FICO credit score typically needed for each type of home loan.

  • Conventional mortgage: 620 FICO credit score or higher
  • FHA mortgage: 580 FICO credit score or higher
  • USDA mortgage: 640 FICO credit score or higher
  • VA mortgage: 620 FICO credit score or higher

Ways to Improve Your Credit Score

If your credit score is not where it needs to be to secure you the best possible mortgage rate, consider the following to improve your credit score:

  • Make all monthly debt payments on time, and ideally, for more than the minimum payment needed. This includes payments for student loans, credit cards, or auto loans.
  • Keep your debt spending, and your subsequent monthly debt payments, ideally lower than 30% of your monthly income, but no more than 43%. This is known as your debt-to-income ratio (DTI).
  • Check your credit report and correct any errors that may be on there.
  • Keep your mortgage search process within a 30-day window to limit the number of hard credit pulls from a mortgage lender. Each credit inquiry will ding your credit score.
  • Work with either a credit counselor or lender to improve your credit score.

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