How Your Credit Score Affects Your Mortgage Rate

Mortgage rates are inherently variable. They fluctuate based on global and domestic economic factors, housing supply and demand, and the borrower’s credit score.

While there’s not much an individual borrower can do to stabilize the national economy, borrowers can make informed choices that widen their lending options. In the current economic climate, credit is more important than ever in lender decision-making. 

A borrower’s credit score is the single most important determining factor of mortgage rates that lies within an individual’s control.

Let’s look deeper into how this important metric helps determine mortgage rates and how borrowers can prepare themselves to secure the best rate possible.

What Are Lenders Looking For?

It’s important to note that credit score isn’t the only financial metric lenders use to determine rates. A borrower’s credit score is among several indicators lenders examine when determining what rate a borrower qualifies for. For example, a borrower’s debt-to-income ratio and size of their down payment also come into play.

It all comes down to risk — the interest rate on a home mortgage is how lenders are able to estimate the risk of lending the principal. The more risk involved in loaning the principal, the higher the required interest rate will be.

A poor credit score indicates a higher default risk. If an individual has a history of poorly managed finances, they may be less likely to manage mortgage payments well. This influences lenders to offer them a higher cost of borrowing. On the other hand, if an individual has an excellent financial history, and corresponding excellent credit score, they’ll have access to lower rates due to their lower perceived risk.

What Is a Good Credit Score?

As of 2022, anywhere between 750 and 850, the highest possible score, is generally considered an excellent credit score. Most lenders don’t need perfection. A good credit score ranges from 700 to 749 and a fair credit score tends to be between 650 and 699. A credit score lower than 650, however, is deemed poor. You will likely see rate increases around each tier drop-off and vice versa.

Like your driving record, passport, or any other valuable identifier, your credit score is worth protecting. This article provides seven helpful ways to protect your credit, including avoiding credit card fraud and identity theft.

How to Estimate the Impact of Your Credit Score

In preparation for securing a new home loan or refinancing an existing one, its best practice to take an honest look at your current financial situation and assess how that will impact monthly payments on a home loan.

  1. Check Your Credit Score Online: Find out if your credit card offers a free credit score. Often times, people come to us wondering if an abundance of credit inquiries will affect their score. Don’t limit your mortgage research over this common qualm. All mortgage inquiries made within a 14-day period are considered one inquiry. Additionally, if you’re actively considering a home mortgage, there’s no need to 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.
  1. See How Your Credit Score Affects Your Interest Rate: FICO offers a loan savings calculator to help better understand the relationship between credit scores and mortgage rates. Plug in your loan type, state, principal amount, and credit score to receive an APR estimate.
  1. See How Your Interest Rate Affects Your Monthly Payment: To estimate your monthly payment in Gainesville, FL, check out our mortgage calculator. Your monthly payment is likely the most practical estimate of how taking out or refinancing a mortgage will affect your family’s day-to-day.

Protect Your Credit With CDM

Home buying is a complex process, and rushing through it without expert advice is unnecessarily risky. The best way to get a complete picture of your financial standing and approach the home buying process with expertise is to contact a mortgage professional. Doing your homework can help manage expectations and improve financial literacy but does not provide estimates accurate enough to rely on with the full confidence a professional team provides. 
Trust the experts at Chris Doering Mortgage to start the pre-qualification process together. (This includes a preliminary credit check.)