Wednesday, June 24, 2015

How your credit score affects your mortgage rate

How your credit score affects your mortgage rate

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Magnifying glass on levels of credit scores © Feng Yu -
The most influential determinant of your mortgage rate is your credit score. The higher your credit score, the lower the interest rate.

One percentage point makes a big difference

Monthly principal and interest payments on a 30-year fixed-rate mortgage for $200,000
Interest rateMonthly principal and interest
Not only is a high credit score vital in getting a low mortgage rate, it influences whether you can get a home loan at all. Buyers below a certain threshold, typically a FICO score of 620, have a better chance of striking oil in their bathtub than securing a mortgage. It's possible, but it will require some digging.

Loan-level price adjustments by credit score

Credit score rangeLTV less than 60%LTV 60.01% - 70%LTV 70.01% - 75%LTV 75.01% - 80%LTV 80.01% - 85%LTV 85.01% - 90%LTV 90.01% - 95%LTV 95.01% - 97%
Greater than 740-0.25000.
Less than 6200.501.50333.
Source: Fannie Mae
A credit score of 740 or more should qualify for the best mortgage rates from most lenders. Depending on the lender, the mortgage rates offered to the highest and lowest credit tiers can vary as much as a full percentage point and a half, says Louis Spagnuolo, a former vice president of mortgage banking at WCS Lending in Boca Raton, Florida.
Good credit can save you thousands on your mortgage. Check your credit score for free at

What lenders look for

Lenders prefer borrowers with low balances, a long history of on-time payments and a mix of credit utilization -- for instance, a car loan and a couple of revolving accounts such as credit cards.
"Lenders look at several variables on the credit report: outstanding debt; the outstanding debt relative to the total available debt; the length of the credit history; and the pursuit of new credit -- how many inquiries are on your report," says Matt Hackett, underwriting manager at Equity Now, a direct mortgage lender in New York.

How to clean up your credit

Ideally, you'll check your credit report a year or so before buying a home. That gives you time to correct errors in the report and change ways you use credit to improve your score.
Get credit reports from Equifax, Experian and TransUnion. Make sure you get reports from all three. The information they contain can vary. Scour everything from the way your name is spelled and previous addresses to checking that each and every account is yours and reported correctly. If an account has been closed, make sure that is accurately reported.
"Sometimes people will quickly glance over their information and that's it. But you should take the time and look at the account numbers," says Steve Katz, senior marketing communications executive for TransUnion.

Correct and wait

All three credit bureaus make it easy to dispute errors online.
If everything is correct, pay down balances and let time do the rest.
The credit reporting agencies do charge a fee if you want to know your credit score. Lenders look at all three scores and use the middle one, Hackett says.

What else you can do

If you're buying a home soon, try not to apply for new credit. Though it's not always avoidable -- for instance, if you need a car loan or college financing -- you should resist opening several new lines of credit in a short time. Multiple new accounts can decrease your credit score.

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