How Does My Credit Affect Mortgage Rates?
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How Does My Credit Affect Mortgage Rates?

Some clients will ask how their credit affects mortgage rates. While the details are different for every single lender and underwriter out there, a few generalities can be said for this relationship. 

How a Good Credit Score Affects Mortgage Rates

Let’s pretend John Doe has a credit score of 750. It’s so high because he

  • Always pays bills on time
  • Has had credit lines for years and years (he doesn’t close credit cards)
  • Boasts a low debt utilization ratio (meaning he has low balances compared to his maximum credit limits)
  • Doesn’t open new accounts very often
  • Has had different types of credit accounts (such as student loans, car loans and credit cards)

All of these factors point to one fact at the end of the day – John is good at managing his money and paying bills. Whether he makes $40,000 a year or $400,000, it doesn’t matter. He manages his money well and is probably a good candidate for a mortgage. 

His high credit score is evidence of this, and will lead to him getting a lower interest rate on his mortgage. Lenders won’t consider him a high risk, so they’re able to offer a lower rate and be confident he will pay it back. 

In fact, it’s not just that they can offer him a low rate. This must due to the competition. If they give John a rate of 4% and a competitor comes to him with a rate of 3.5%, they lose. So most lenders John contacts will give him great terms on his mortgage. 

How a Fair Credit Score Affects Mortgage Interest Rates

Let’s say your credit score is 630. While that is high enough that you can qualify for a mortgage, your interest rate will probably be higher. 

The reasoning is tied to what happened with John Doe above. Your credit score reflects how well you manage your money and pay off debt. A fair credit score can mean a number of things

  • Recurring payments have been missed
  • Debt gets moved around from one account to another too often
  • New accounts keep getting opened regularly
  • Your debt utilization ratio is too high
  • Accounts, such as credit cards, get closed when it’s unnecessary to do so

A few of these things don’t tank your credit score. As long as you are still responsible, it will stay in the “fair” range and you can get a mortgage. But the lower credit score is a red flag to lenders, so they’ll likely offer you a higher interest rate on the mortgage to compensate for the additional risk. 

Poor Credit Scores and Mortgage Interest Rates

Unfortunately, if you have a poor credit score (under 580), you’re unlikely to get a mortgage. This score raises a big red flag to lenders, and they will be hesitant to offer you a mortgage due to concerns of your ability to pay it every month. 

Even if a lender does offer you a mortgage, the interest rate will be high, meaning you’ll pay a lot more money in the long run for this home. 

Why is is suddenly more difficult to get mortgage even though we are experiencing low interest rates? Read more here.

Conclusion

At the end of the day, the higher your credit score, the better your interest rate. If you have any other questions about the mortgage process or buying a home, give us a call at 949-392-6400.

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