Your credit score is one of the most important factors in how much you‘ll pay for a mortgage, or even whether you qualify for a mortgage at all.
The reason your credit score, or your FICO score as it’s known in the financial industry, is so important is that mortgage lenders will use it to determine how much of a risk it is to lend to you, based on your history of paying your bills on time and other factors.
Lenders will generally feel you’re a safer bet to loan to when your credit score is higher, and you could therefore qualify for a lower interest rate on your mortgage. Your interest rate is the amount you pay on top of the principal, so the lower that is, the less you will pay for your mortgage overall.
We talked to a few mortgage experts to give you a sense of what sort of mortgage rates you might be qualified for based on your credit score, and to help you understand the relationship between your credit score and your mortgage options.
How Credit Scores Are Determined
There are three major credit bureaus that keep track of your credit history: TransUnion, Equifax, and Experian. All three have their own way of formulating your exact credit score, but they use the same basic set of information.
“Your credit score is determined by your ability to repay monthly debt obligations on time. Missing payments can negatively impact your score, but making regular payments, at or above the minimum due for credit cards, positively impacts your score,” says Scott Hermann, CEO of Identity IQ. “Recently, rent payments started to count toward some mortgages, so that’s positive for potential homeowners who are responsible with their money.”
While your ability to pay your monthly bills — usually utilities, car payments, and the like — are the primary concern, Mike Tassone Co-Founder at Own Up, says that Credit Reporting Agencies also look “at your entire financial picture, including payment history, amounts owed, length of credit, new credit, and your overall credit mix. A history of timely payments often matters the most.” Also, the agencies “look at the amount of your outstanding revolving debt, typically credit cards, relative to your available credit lines with lower revolving debt utilization viewed favorably.”
By federal law, you can get a free credit report once a year that will let you know what your score is, so you can then determine if you’re comfortable applying for a mortgage or if you’d rather work on your score for a while by focusing on making your payments on time and perhaps considering a debt consolidation loan.
Additionally, “there are services that provide real-time credit monitoring and can provide you with the most up-to-date credit scores as well as send you alerts if there are major changes to your scores,” says Hermann.
How Your Credit Score Impacts Your Rates
The interest rate you qualify for is based on a number of factors, some of which are out of your control, such as the current national interest rate. But as far as what you can control, such as making your monthly payments on time, “if you are current on your monthly obligations then you have a higher credit score, which means you are more likely to make your mortgage payment on time and there’s less risk to lend to you,” says Hermann. “If the lender is taking on more risk, reflected by a lower credit score, they can charge you more for taking on that extra risk.”
That said, it’s not always a clean one-to-one translation. “However, a good credit score doesn’t automatically mean you’ll get the best rate, as the amount of your equity, your loan purpose and type, as well as the type of property you are purchasing (condo/single-family/multifamily) also has an impact on rate,” says Tassone. “In truth, rates can vary widely between lenders, even for homebuyers with the same credit score. While it’s important to have a good credit score when securing any loan, getting multiple, personalized loan offers will enable you to get a better mortgage rate than relying solely on your good credit score.”
Is There a General Formula for How Your Credit Score Translates to Your Mortgage?
Not really, as every lender has different criteria for how they determine your rate, so Hermann advises you to shop around.
“Look at several lenders to see what they are willing to give you, mortgage-wise. Also, credit scores are just one of many ways lenders determine your eligibility,” says Hermann. “For example, if you have a fair credit score, but have a high income and savings to tap, the lender can take that into consideration when offering you your mortgage rate.”
In addition to your credit score, the specific type of home you are looking for will also be a big determining factor. “While lenders typically follow similar underwriting guidelines to determine a rate, they evaluate borrower profiles differently based on the specific scenario,” says Tassone. “For example, if you happen to be looking for a condo instead of a single-family home, and you are able to put more money down, or need a certain loan product, all of those factors get weighed into the rate you are offered. Some lenders have better pricing for certain borrower profiles and thus can offer better terms to those borrowers.”
Mortgage Rates for Spouses
If your spouse has a better credit score than you, and you both apply for a mortgage loan, will your spouse’s score increase your chance of getting a good rate, or will your score drag it down? “The short answer is, it depends,” says Tassone. “If you file a joint mortgage application, a mortgage lender won’t average out your credit scores, they will still look at and price the loan to the lowest credit score on the application.
“The primary benefit of a co-borrower is adding additional income to the mortgage application to reduce the debt-to-income ratio which can determine whether or not you qualify for financing and which loan programs are available to you,” he adds. “If there is a big differential between your score and your spouses and the higher credit spouse can meet the debt-to-income ratio requirements on their own, that is often the best route to securing the lowest rate.”
Excellent, Good, Fair, and Poor Credit Scores
To give you a frame of reference, Hermann provided the following basic range.
- Excellent (760 and above) “You may generally be able to qualify for the best rates, depending on your debt and income levels and the amount of equity you have in any collateral. This rate goes higher as your score dips down, as we show below.”
- Good (700 – 759) “You may typically be able to qualify for credit, depending on your debt and income levels, and collateral value (but you may not get the best rates).”
- Fair (621 – 699) “You may have more difficulty obtaining credit and will likely pay higher rates for it. Much higher.”
- Poor (620 and below) “You may have difficulty obtaining unsecured credit. It’s not advisable to get a mortgage rate with this kind of score, even if you can find a lender who is willing to work with you.”
Mortgage Rates by Credit Score
The following ranges were provided by Tassone, who added the qualifier that “No matter which Credit Score Range you fall in, mortgage rates can vary widely based on lenders.”