If you are planning on buying a house, then you will likely have a mortgage to go along with it. As with any other major loan, your credit score will impact your mortgage rate. But how?
Understanding What Mortgage Lenders Learn from Your Credit Score
To understand the relationship between your credit score and your mortgage rate, you need to understand what it tells potential lenders. Essentially, lenders see your score as an idea of whether you will likely pay your mortgage and do so on time. Higher scores are better.
Classifying Credit Scores and What It Means for Your Mortgage
The following shows how most creditors classify credit scores:
- Excellent: 740+
- Good: 700 – 739
- Fair: 630 – 699
- Poor: 629-
Generally speaking, you want a score of at least 700 to get the best possible rate on your mortgage. You can still get a good loan even if your score is under 680, but the higher, the better.
The Interest Rate Has a Big Impact on the Bottom Line
When you look at the numbers, a difference in 100 points or so on your score may only increase your interest rate by 0.5 percent. But with a 30-year mortgage, that can make a huge difference. If you have a $240,000 loan, a 0.5 percent difference results in paying $25,300 more over the life of the mortgage.
Have a Lower Credit Score? It Doesn’t Matter as Much for Some Loan Types
Interestingly, there are some types of home loans where your score isn’t as important. USDA, VA, and FHA loans typically have minimum scores of 640, 620, and 500, respectively.
Quick Tips to Boost Your Credit Score
Given the importance of your credit score for your mortgage rate, you want to do what you can to boost it before you buy your house. Some quick tips include checking for errors, settling late bills, paying bills on time, and reducing your balance.