Your credit score plays a large role in the process of applying for and obtaining a mortgage.
Generally speaking, the higher your credit score, the lower your mortgage rate — and the more money you stand to save. Mortgage lenders use your credit report to gauge your risk as a borrower — and the lower your score and spottier your history, the riskier you will appear to most lenders.
If you have a poor credit score, you won’t qualify for the best mortgage rates available, which could mean you’ll end up paying more money over the term of your mortgage. The percentage increase may seem small, however, the difference between 3% and 3.25%, for example, can add up, especially if you’re applying for a 30-year fixed-rate mortgage.
- Mortgage lenders prefer candidates who have a better credit rating, as it shows more financial responsibility.
- A good-to-excellent credit score is 700+.
- A candidate with a higher credit score will usually receive more favourable terms, such as a lower interest rate and lower monthly payments.
- If you have trouble repaying your mortgage on time, your credit score will almost certainly suffer.
Why Does Credit Score Affect Mortgage Rate?
As a borrower, your credit score reflects your past credit usage, which lenders use to measure how responsible you are with credit. It speaks to your past payment, debt management and general financial habits, and it gives lenders an idea of what they can expect if they loan you money to buy a home.
As such, credit scores directly influence what mortgage rate a lender offers you. Higher credit scores will usually mean a lower interest rate (and a lower monthly payment), while lower scores will usually receive higher rates.
The Federal Reserve reports that 90% of U.S. mortgages taken out in the first quarter of 2019 were by home buyers with a score of at least 650, and 75% had a score higher than 700.
What Credit Rating Will I Need to Qualify?
It’s not just your interest rate that’s impacted by your credit score, but the long-term costs of your loan, too.
A credit score of 700-plus will usually land a borrower a lower interest rate, and while mortgage industry experts say you can still qualify for certain loans with a score under 680, the 700s are where you can expect to pay the lowest rates.
Creditors set their own standards for what constitutes an acceptable score, but these are general guidelines:
- A score of 740 or higher is generally considered excellent credit.
- A score between 700 and 739 is considered good credit.
- Scores between 630 and 699 are fair credit.
- And scores of 629 and below are poor credit.
While you can likely qualify for a home loan with a rate lower than the median, a higher credit score typically means better interest rates and loan options. A multitude of other factors can also influence the mortgage-approval process, including the cost of the home, the size of the down payment and your income.
How Does Credit Score Affect Mortgage?
How might a mortgage positively impact your credit score?
Payment history: A typical mortgage provides the opportunity to make 30 years’ worth of on-time, credit-building payments.
Credit mix: By managing a mix of installment loans like mortgages and auto loans as well as revolving credit card accounts, you show your ability to handle different types of credit.
Length of credit history: Although a new mortgage works against this metric, over the life of the loan, your mortgage becomes a long-term account that shows longevity.
The sheer size of a typical mortgage can also play in your favor. Make on-time payments over the life of the loan, and the positive influence your mortgage has on your credit will be long-lasting.
How might a mortgage negatively impact your credit score?
If you have trouble repaying your mortgage on time, your credit score will almost certainly suffer. Most mortgage lenders extend a grace period of 15 days before they’ll penalize you with a late fee. If a payment is 30 days or more past due, they will report it as late to the credit reporting agencies.
Even one 30-day late payment can have a lasting effect on your credit. Payment history accounts for 35% of your credit score and is the biggest factor in its calculation. A late payment will appear on your credit report for seven years, though its effect diminishes over time.
An unpaid mortgage that goes into foreclosure creates its own set of problems. In a foreclosure, multiple missed payments cause your mortgage to go into default. As part of your loan agreement, your lender has the right to seize your property and sell it to recover their money.
The missed payments that lead up to foreclosure—120 days or four successive missed payments is typical—will seriously damage your credit. The foreclosure itself also becomes a negative item on your credit report. Worst of all, you lose your home and any financial stake you have in it.
How Can I Improve My Credit To Get a Better Mortgage?
Improving your credit score is the best way to increase your chances of qualifying for a mortgage loan, as well as getting a lower interest rate.
To do this, you can take some simple steps, such as:
- Pay your bills on time: Late payments can hurt your score significantly.
- Settle any late bills or accounts in collections: These can hurt your score considerably, too.
- Check your credit report for errors: These should be reported to the credit bureau ASAP, as correcting them can improve your score.
- Pay down your balances: Higher balances equal lower credit scores. Using a high percentage of your available credit lines can also hurt your score, so try to lower your overall credit utilization as well.
- Keep your accounts open: Having a long credit history can actually help improve your score, so even if you pay off a balance in full, keep the account open if you can.
Once you’re getting ready to buy a home, you should also take steps to protect your credit. Avoid any big purchases, don’t apply for any new credit cards or loans, and make sure to shop around for your loan within the same short period. This will keep those credit inquiries from hurting your score — and your chances of getting a loan.
Make sure to shop around for a Mortgage Plan to suit your needs.
No matter what your credit score is, shopping around for your mortgage is critical. Interest rates, loan products, terms, and more all vary by lender, and if you want the best deal on your loan, you’ll need to consider at least a few different lenders in your search.