Mortgage

Mortgage charges by creditworthiness: what does your rating deliver you?

What mortgage rates will I get based on my credit history?

If your credit score is 740 or better – and your finances are in good shape – you should be eligible for some of the lowest mortgage rates on the market.

But that's not a hard rule. Some loan types offer mortgage rates that are below market value, even with moderate creditworthiness. And many factors besides creditworthiness also affect your rate.

So explore all of your options to make sure you're getting the lowest possible interest rate for your credit history.

Find your lowest mortgage rate. Start Here (02/02/2022)

In this article (Continue to…)

Mortgage rates are based on credit ratings

Mortgage rates are generally based on your creditworthiness rather than your exact FICO score. So, lenders will look at the range your score falls in and adjust your interest rate and fees accordingly.

While each lender is free to set its own rules, many follow compliant lending levels set by Fannie Mae.

≥ 740 – Lowest mortgage rates720-739700-719680-699660-679640-659620-639< 620 – Highest mortgage rates

Fannie and Freddie Mac generally do not lend to borrowers with a score below 620. If your score is lower, consider FHA loans (or VA loans if you have military service history).

Why your credit rating matters

The fact that lenders use loan increments to determine interest rates is very important. That means you might be able to snag a lower price without boosting your score all that much.

Let's say your current score is 718 or 719. You would only need to move it up a notch or two to get to a higher tier with a lower mortgage rate. And most of us can improve our score by a few points in a month or two.

However, the opposite is also the case.

Lenders routinely do a final check on your credit score in the last few days before closing. And if your score has fallen to a lower tier, you may have to expect a higher mortgage rate. So be careful not to open new lines of credit, miss payments, fund large items, or do anything else that could hurt your score before closing.

Find your lowest mortgage rate. Start Here (02/02/2022)

How Credit Score Affects Your Mortgage: Examples

There is often a big difference between mortgage rates at the highest and lowest end of the credit score spectrum. And that makes a big difference in monthly mortgage payments and long-term interest costs for homeowners.

Here are some examples that show how these differences in credit ratings can affect your mortgage costs.

Mortgage rates based on creditworthiness

FICO, the largest credit rating company in America, has a handy online calculator that shows how much mortgage rates vary by credit rating.

As an example, here is how the average annual percentage rate (APRs) changed by credit rating in early February 2022. Keep in mind that interest rates are always changing and will likely be different by the time you read this. These numbers are meant as an example only to show you how widely prices can vary.

FICO scoreMortgage APR*760-8503.285%700-7593.507%680-6993.684%660-6793.898%640-6594.328%620-6394.874%

*myFICO.com APR is for example purposes only. Your own interest rate will be different. Prices obtained on February 1, 2022.

Mortgage payments based on creditworthiness

According to the Mortgage Bankers Association, the average loan amount for a home purchase in December 2021 was $423,100.

We use this loan amount and FICO's APR estimates (above) as an example to show how loan levels affect mortgage payments and long-term interest costs.

FICO scoreMortgage APR*Estimated monthly payment*Total interest (30 years)* 760-8503.285% $1,849 $242.718700-7593.507% $1,902 $261.444% $1,943 $276.58% $1,943 $2798% $1.995 $295.152640-6594.328$.2 $8%39.12 €2.10€

*Payment examples and APR obtained from myFICO.com on February 1, 2022. Payments based on a loan amount of $423,100 and a 30-year fixed rate mortgage loan. Your own interest rate and monthly payment will be different.

If you compare the highest and lowest credit ratings, the better-rated borrower saves about $390 per month and $140,000 in total interest over the life of their mortgage loan.

Of course, most people fall somewhere between these two extremes. But the point is, your credit can have a big impact on both your interest rate and the amount of interest you pay your mortgage lender.

If you're able to improve your score before applying for a home loan, it could result in significant savings over the next few decades.

Find your lowest mortgage rate. Start Here (02/02/2022)

Why Your Credit Score Affects Your Mortgage Rate

Your credit score is a numerical representation of the points on your credit report. Lenders report your loans and payments to credit bureaus and these are included in your report.

Then an algorithm crawls over your report and assigns numerical values ​​to each element. So you get minus points for late payments and other “bad” behavior. And you get positive points for on-time payments and other "good" behavior.

The goal of your credit score is to determine how responsible or irresponsible you are as a borrower. This can help lenders decide how "risky" your loan is and what interest rate to charge you.

loan types

Home buyers with poor credit are excluded from some types of mortgages.

If your score is between 580 and 619, you probably have no choice but to go for an FHA mortgage. Fannie and Freddie's policy disqualifies virtually anyone with a score below 620 from a compliant loan.

And that can have real downsides. FHA loans are very popular and benefit many borrowers. But unlike the Fannie and Freddie mortgages, they collect mortgage insurance payments until you move, refinance, or pay off your loan.

Meanwhile, jumbo loans, which let you borrow millions, tend to have significantly higher credit thresholds than other mortgages. While some individual lenders may be less demanding now, they will almost inevitably charge higher rates to those with lower ratings.

Risk-Based Pricing

Traditional mortgage loans — the most common type of home loan — are also subject to "risk-based pricing," where your creditworthiness feeds into your interest rate and fees.

A federal regulator, the Consumer Financial Protection Bureau (CFPB), defines risk-based pricing as follows:

“Risk-based pricing occurs when lenders offer different interest rates or different loan terms to different consumers based on the estimated risk that consumers will default on their loans.

"Each lender uses their own process to determine your risk of defaulting on a loan, but most use your credit score, employment status, income, and other outstanding debt, among other things."

That second paragraph is important. If each lender uses their own processes to decide the risk you're taking, you might get a better interest rate from one lender than another for the same score.

That's why it's so important to look after your mortgage. Every lender is different and you won't know which one can offer you the best interest rate until you compare personalized offers.

How to get the best mortgage rate for your credit rating

A comparison purchase for your mortgage can make a big difference. The CFPB said in 2018, "Previous Bureau research suggests that failure to compare a mortgage costs the average homebuyer about $300 a year and many thousands of dollars over the life of the loan."

But — before you even get to the mortgage-buying stage — you can work to improve your chances of getting a lower interest rate.

For example, if you save enough for a down payment above the minimum required, you might get a lower interest rate even if your score isn't impressive.

The same applies if you only have a few old debts. Those with a low debt-to-income ratio are more likely to be able to afford their new mortgage payments than those who are already struggling to stay afloat.

Lenders consider these two factors, along with your creditworthiness, when deciding the mortgage rate to charge you.

Tips to improve your credit score

And of course you can also increase your creditworthiness on your own. Read how to increase your credit score fast for helpful tips.

Some of the most powerful steps you can take to increase your credit before applying for a mortgage are:

Pay every bill on timeDecrease your credit card balance. Make sure each card stays under 30% of its respective credit limit. Avoid opening or closing credit accounts, except for installment loans that will be paid off

You should also order a copy of your credit report from AnnualCreditReport.com. This site is owned by the Big 3 credit bureaus. And you are legally entitled to a free copy of your report each year.

Many reports contain errors. And it can take months to correct them. So start the process early.

Check your mortgage rates

Your credit rating is just one factor that goes into determining your mortgage rate. Other important factors are your loan type, loan term (e.g. 30 or 15 years) and the current interest rate market.

If you want to know what interest rate you qualify for, contact a mortgage lender. You can fill out a quick pre-approval application that will give you a good idea of ​​your interest rate, your home buying budget, and the future monthly payment.

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Show me today's prices (February 2, 2022)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for the products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policies or position of Full Beaker, its officers, parent companies or affiliates.

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