A reader recently asked, “What mortgage rate can I get with my credit score?” So I figured I’d try to clear up a somewhat complex question.
With mortgage rates near historic lows, borrowers looking to refinance or purchase a home seem to be increasingly curious about what they’re actually eligible to receive, because as we all know, what you see advertised isn’t always what you get.
Generally, the interest rate always tends to be higher…let’s explore why that is.
Mortgage Rates Are Based on Your Credit Score
The graphic above is based on real advertised rates from Zillow’s marketplace for a $400,000 loan amount at 80% loan-to-value (LTV) for a 30-year fixed on an owner-occupied, single-family residence.
Notice that the interest rate is a full 0.75% higher for a borrower with a 620 FICO score versus a borrower with a 740+ FICO score. That can equate to a lot of money over time.
One thing that determines what mortgage rate you’ll ultimately receive is credit scoring, though it’s just one of many factors, known as mortgage pricing adjustments, used to price your loan.
Each pricing adjustment is essentially applied based on risk, so a borrower with a high-risk loan must pay a higher mortgage rate than a borrower who presents low risk to the lender. This is how risk-based pricing works.
In short, the less risk you present to your lender, the lower your mortgage rate will be. And vice versa.
Lenders consider a number of things to measure risk, as mentioned above. Using credit score alone, it’s impossible to tell a prospective borrower what they may qualify for without knowing all the other important pieces of the puzzle.
But I will say that your credit score is definitely one of the most important (if not the most important) factor that goes into determining your rate.
Mortgage Lenders Use Credit Scoring Thresholds
Generally speaking, a credit score of 740 or above should land you in the lowest-risk bracket, meaning if all other areas of your unique borrowing profile are in good standing, you will qualify for a mortgage at the lowest possible interest rate.
As mentioned, your credit score can be hugely important in determining pricing because lenders charge massive adjustments if your score is low.
Just take a look at the chart above from Fannie Mae. If your credit score is 740 or higher, you’ll only be charged as much as 0.25% (this isn’t rate but rather a pricing hit) all the way up to 95% LTV.
Conversely, if your credit score is between 620 and 639, you’ll be charged as much as 3.25% in pricing adjustments.
For the borrower with a 620 credit score, this might equate to an interest rate of say 4.5% on a 30-year fixed mortgage, while the borrower with a 740 score receives a much lower rate of 3.75%.
That difference in rate could stick with you for years if you hold onto your mortgage, meaning higher payments month after month for potentially decades, all because you didn’t practice good credit scoring habits.
Not only can a good credit score save you money monthly and over time, it will also make qualifying for a mortgage a lot easier.
For these reasons, your credit score should be your top concern when applying for a mortgage!
Mortgage Ads Assume You Have Excellent Credit
If you’ve ever seen a mortgage advertisement on TV or the Internet, they assume you’ve got an excellent credit score. This could mean a credit score of 720, 740 or higher. And they use that assumption to produce a favorable mortgage rate in their ad. But without that great score, your mortgage rate will be higher.
Additionally, borrowers with credit scores of say 660, 640, and 620 will have increasing difficultly securing financing, and will receive higher mortgage rates, assuming a mortgage is ultimately granted.
Unfortunately, I can’t say you’ll get X or Y mortgage rate if you have Z credit score, there are just too many factors in play all at once.
But I can say that your credit score is hugely influential in determining both the mortgage rate you’ll receive and whether you’ll receive financing to begin with, so it’s recommended that you check your credit score(s) months before applying for a mortgage to see where you stand.
Check Your Credit Before Shopping for a Mortgage!
If you don’t know your credit scores months in advance, you won’t have adequate time to make any necessary changes. Trust me, surprises come up all the time when it comes to credit.
An erroneous medical collection could deflate your credit score substantially, even if it’s reporting in error. And that lower score could increase your mortgage rate a percentage point or more. Yes, credit scores can make that much impact!
Disputing errors and/or addressing other credit missteps can take several months to complete, so don’t hesitate to check your credit if you think you’ll be applying for a mortgage at any point in the near future.
Read more: What credit score do I need to get a mortgage?