How your credit score affects your mortgage rate
By Sheyna Steiner • Bankrate.com
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 rate||Monthly 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 range||LTV 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||-0.25||0||0||0.25||0.25||0.25||0.25||0.25|
|Less than 620||0.50||1.50||3||3||3.25||3.25||3.25||3.25|
Source: Fannie Mae
Good credit can save you thousands on your mortgage. Check your credit score for free at mybankrate.com.
What lenders look forLenders 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 creditIdeally, 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 waitAll 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 doIf 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.
Read more: http://www.bankrate.com/finance/mortgages/how-credit-scores-impact-your-mortgage-rate-1.aspx#ixzz3e2oaTd7R
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