What Mortgage Rate Can I Get With My Credit Score?

July 31, 2009 No Comments »

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.

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.

Mortgage Rates Are Based on Your Credit Score

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.

Along with credit scoring is documentation type, property type, loan amount, loan-to-value, and several others.

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 that presents low risk to the lender. This is how risk-based pricing works.

In short, the less risk you present to the 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.

Mortgage Lenders Use Credit Scoring Thresholds

However, generally speaking, a credit score of 760 or above should land you in the lowest-risk bracket, meaning if all other areas of your unique financial profile are in good standing, you will qualify for a mortgage at the lowest possible interest rate.

In other words, you’ll enjoy a lower monthly mortgage payment and save a ton of money over the entire mortgage term.

This is why credit scoring is so very important. Not only can it save you money monthly and make qualifying a breeze, but it can save you thousands over the many years you hold your mortgage.

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.

Borrowers with credit scores of say 680, 660, and 620 will have increasing difficultly securing financing, and will receive higher mortgage rates, assuming a mortgage is ultimately granted.

[How to get a mortgage with a low credit score.]

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 one of the most important factors 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 well before applying for a mortgage, 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 boost your mortgage rate a percentage point or more higher. Yes, credit scores can make that much impact!

Disputing errors and/or fixing other credit missteps can take several months, so don’t hesitate to check your credit if you think you’ll be applying for a mortgage anytime in the near future.

Read more: What credit score do I need to get a mortgage?

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