How Your Credit Score Affects Your Mortgage Rate

Mortgage interest rates are inherently variable. They fluctuate based on economic factors, both global and domestic, housing supply and demand for a particular area, and the credit score of the borrower.

There’s not much an individual borrower can do to stabilize the national economy. You can be smart about when and where you look for a home and make informed choices about what you can afford. But the major determining factor of mortgage interest rates that you have the most control over is credit score.

Let’s take a look at what credit score means in determining interest rates, and how you can prepare yourself to secure the best rate possible.

What Lenders Are Looking For

Credit score is among several personal financial indicators that lenders examine to determine what rate a borrower qualifies for.

It all comes down to risk- the interest rate on a home mortgage is how lenders are able to assume the risk of lending the principal (amount of the loan).

The more risk involved in loaning that principal, the higher the required interest rate will be.

A poor credit score is one metric that indicates the potential risk associated with a borrower. If that individual has a history of poorly managed finances, they may be less likely to manage mortgage payments well.

On the other hand, if an individual has an excellent financial history, leading to an excellent credit score, they’ll have access to lower rates due to the lower risk associated with lending.

Credit score isn’t the only financial metric lenders may use; debt-to-income ratio and the size of the down payment also have an impact. But overall, credit score is a good indicator of financial history, and correlates with the mortgage interest rate that will be available.

What Is A “Good” Score?

So how does a credit score actually correlate with mortgage interest rate? Let’s take an example.

Here’s what credit scores meant for rates, taken from Sept. 1 to Nov. 7 of 2016:

Credit Score and Mortgage Rates

When you translate that to payments, it can add up quickly. For a $200,000 30-year fixed home loan, a rate of 3.6% means your monthly payments will be $909. At 4%, that’s $955. And at a mortgage rate of 4.5%, you’ll be paying up to $1,013 a month for principal and interest.

Find Your Own Credit Score

In preparation for securing a new home mortgage loan or refinancing your existing one, you should know everything you can about your current financial situation and how that will impact what you’ll pay in interest loans.

At Chris Doering Mortgage, we can help you become pre-qualified for a home loan, which includes a preliminary credit check. This is the best way to get a complete picture of not only your financial standing, but also gives you an idea of what a home loan will mean for you.

You can also check your own credit. Find out if your credit card offers a free credit score.

A common question we receive is whether checking your credit affects your credit score. Sometimes, an abundance of credit inquiries can affect your score- but don’t limit your mortgage research on the basis of affecting your credit score.

If you’re actively considering a home mortgage, you shouldn’t worry. The pre-approval and mortgage credit check process doesn’t include any mortgage or auto loan credit inquiries made within the previous 30 days. In addition, all mortgage inquiries made in any 14-day period are considered one inquiry.

Protect and Prepare (or Repair) Your Credit

Credit score is an important factor in determining your mortgage rate. Follow the steps here to protect your credit:

Protect your credit score

Tips to Protect Your Credit

In the current economic climate, credit is more important than ever in the process of lender decision-making. In this article, Chris Doering Mortgage shares with you helpful ways you can protect your credit. Learn how you can avoid credit card fraud and identity theft. Read More