Mortgage Rates and Your Credit Score

How Does Your Credit Score Affect Your Mortgage?

It’s true, mortgage lenders do check the credit scores of mortgage applicants. Your credit score determines your interest rate for several reasons.

Lenders want to identify the most reliable borrowers, and they will approve loans for them at favorable rates. Moreover, all other things being equal, lenders are more likely to raise rates on borrowers whose credit history indicates financial problems (such as late payments or default). Lower interest rates also mean lower monthly payments on your loan.

After years of lower than historical mortgage rates, the cost of buying a home is rising, causing interested buyers to take a more critical look at their finances, credit scores, and ability to afford the home of their dreams.

Where the average 30-year fixed mortgage rate in 2021 was 2.96%, today’s home buyers are finding the average rate has jumped to 5.83%, and it may go higher still.

Of course, an average rate is not what you might expect to be offered if you have bad credit. A low credit score could increase your mortgage rate by 1% or more.

Your Credit Score

While there are several different credit scoring systems, like FICO and VantageScore, the general ratings system work like this:

  • Exceptional: 800-850
  • Very good: 740-799
  • Good:670-739
  • Fair: 580-669
  • Poor: 300-579

You can check your credit score by visiting the website https://www.annualcreditreport.com/ (the only source for your free credit reports as authorized by Federal law). If you use a Discover Card, cardmembers receive a free FICO credit score update with each monthly statement.

Factors that lower your score include late or missed payments, too much credit in use at one time, too many requests for new credit, and a short (or non-existent) credit history. It may seem paradoxical, having too few types of credit also lowers your score.

Higher credit scores are reflective of prompt payments, a well-managed mix of credit, and low balances on your credit cards. Importantly though, closing a credit card account does NOT help improve your credit rating, because an account’s history is important, and closing an account removes that history from your records. So, paying off an account, but keeping it open helps tip the scales toward a good credit score.

Your Spouse’s Credit Score

Credit ratings are mixed bag when it comes to married couples. When one partner has a good credit rating and the other a lower score, the two credit reports do not affect one another. Each married partner retains their own credit score.

Joint bank accounts appear on and affect both credit scores.

But most importantly, when you go to buy a home together, the lower score of the partner with the bad credit history will affect your mortgage rates.

Bad Credit’s Effect on Mortgage Rates

A low credit score can be unsettling when it comes to your mortgage. The minimum credit score requirements for a mortgage vary by lender and the type of loan. However, you may find fewer options if your score is low, as well as higher rates.

You may have difficulty getting a mortgage if your credit score is below 620, at least not without paying a high rate for the privilege. If your score falls in the “good” or “excellent” range, there may be several lenders who will give you low interest rates and lower down payment requirements.

If you have a low credit score or don’t have much cash saved for a down payment, you might consider an FHA loan. FHA loans are insured by the Federal Housing Administration, and the minimum credit score for an FHA loan is usually 580. But having a higher score can save you money on your mortgage rate and help make your home buying journey smoother.

Veterans, qualified service members and spouses may be eligible to buy a home with help from a VA Loan. There’s no industry-set minimum credit score to qualify, but it is sometimes possible to get a VA mortgage loan with a credit score as low as 580.

Over a 30-year mortgage, the difference between the savings experienced between home buyers with a high credit score and those with bad credit can range into the tens of thousands of dollars.

But don’t lose hope! Be sure to ask your mortgage broker or lender what options are available for you.

Know Your Credit Score Before You Act

Today, mortgage rates are rising fast. You may be tempted to act now before home loans rocket out of sight, but though it’s wise to move quickly, you should still go in armed with a knowledge of your credit scores, and possibly take a few steps to improve those scores before shopping for a mortgage. You don’t need to give up on your home buying plans if you have bad credit, but awareness and a few careful steps could save you thousands, even tens of thousands of dollars down the road.

Did you know you can improve your credit score in less than 30 days? You can learn some of the secrets from this article on Nerdwallet: How to Improve Credit Fast.

Homebuyer Guide

Even if this is your second home buying experience, you’ll find solid information in our “First Time Homebuyer Guide.” This 40+ page guide delivers a range of critical information from Understanding the Mortgage Process and Types of Loans to Avoiding Discrimination and which states have no LGBTDQ+ Housing Protections.

Find the Help You Need

The LGBTQ+ Real Estate Alliance, a 501(c)6 organization, was launched in June 2020 by leading members of the real estate industry.  The mission of the Alliance is to Advocate, Elevate, and Celebrate. The Alliance advocates for fair housing for all and promotes LGBTQ+ homeownership.

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