Your Credit Score and How It Affects Your Interest Rate
Mortgage rates determine your monthly payment for your home loan and the total amount that you'll be repaying. However, mortgage rates can be a fickle factor to estimate when figuring out your mortgage costs.
While the news may boast about low rates, you might not be able to obtain that exact rate. There are many factors that go into determining your mortgage interest rate such as your loan option, property type and down payment amount.
But the number one thing that affects your interest rate is your credit score.
What's My Credit Score?
Your credit score is a three-digit number generated from information in your credit report. It is designed to predict risk and the likelihood that you'll pay your credit obligations back on time. It's for this reason that lenders look to your credit score to make a more informed decision about you regarding your loan qualification. By acquiring your score through major credit bureaus (TransUnion, Experian and Equifax), lenders will look at your bill payment history, along with the number of outstanding debts you have, in comparison to your income to decide if you qualify for a home loan with them.
Keep in mind that the higher your credit score, the easier it is to obtain a mortgage and a lower interest rate:
Excellent Credit Score: 800 and higher
Very Good Credit Score: 700 – 799
Good Credit Score: 680 – 699
Ok or Fair Credit Score: 620 – 679
Poor Credit Score: 580 – 619
Bad Credit Score: 500 – 579
Very Bad Credit Score: 499 and lower
A bad score means you're a risk to the lender. For example, delinquency (whether you make regular credit payments on time) accounts for more than a third of your credit score, so if it shows you have issues paying regular credit payments on time, it'll be hard for the lender to trust you to pay them on time.
If you have a high credit score, you'll directly benefit by receiving a lower interest rate, ultimately meaning lower monthly payments and less cost overall. Someone with a score between 760 and 850 could be offered an interest rate as much as 25% lower than those with a score between 620 and 640!
If you're at the beginning of your home purchase process, check your credit score and try to improve it if it's low, before continuing on with your home purchase. If you're already in a position where you can't improve your score, you may be able to be more appealing to your lender by putting down a higher down payment.
To learn more about qualifying for a mortgage and how to get a low interest rate, check out our FREE eBook "Demystifying the Mortgage Process".