How Credit Scores Affect Mortgage Rates

Your credit score is one of the most important factors lenders use when determining your mortgage rate. A higher score can save you thousands of dollars over the life of your loan, while a lower score may result in higher interest rates or even loan denial. Let’s break down how your credit score impacts your mortgage and what you can do to improve it.

Why Does Your Credit Score Matter?

Lenders use your credit score to assess risk. Simply put, the higher your score, the less risky you appear to lenders. Borrowers with higher scores are more likely to make on-time payments, while lower scores suggest a higher likelihood of missed payments or defaults. To offset that risk, lenders charge higher interest rates to those with lower scores.

Credit Score Ranges and Their Impact on Mortgage Rates

Here’s a general breakdown of credit score ranges and how they may impact mortgage rates:

• 760+ – Excellent credit; qualifies for the lowest interest rates available

• 700-759 – Good credit; still eligible for competitive rates

• 660-699 – Fair credit; rates may be slightly higher

• 620-659 – Below average; higher rates and limited loan options

• Below 620 – Poor credit; may still qualify for government-backed loans but with significantly higher rates

How a Higher Score Saves You Money

Let’s say you’re borrowing $400,000 for a home:

• With a 760+ credit score, you might qualify for a 6.5% interest rate, resulting in a monthly payment of about $2,528 (excluding taxes and insurance).

• With a 640 credit score, your rate might be 7.5%, making your monthly payment around $2,797—an increase of $269 per month or over $96,000 more in interest over 30 years!

How to Improve Your Credit Score Before Applying

If you’re planning to buy a home, taking steps to improve your credit can lead to significant savings. Here are a few ways to boost your score:

✅ Pay down credit card balances – Keep your credit utilization below 30% of your limit.✅ Make all payments on time – Even one late payment can lower your score.✅ Avoid opening new credit accounts – Hard inquiries can temporarily lower your score.✅ Check your credit report for errors – Dispute any mistakes that may be dragging your score down.✅ Keep old credit accounts open – The length of your credit history plays a role in your score.

Final Thoughts

Your credit score directly affects the mortgage rate you’ll receive, so improving it before applying for a home loan is one of the best ways to save money. If you’re unsure where your score stands or need guidance on improving it, I’d be happy to help! Let’s set up a time to review your options and create a plan to get you the best possible rate.

Thinking about buying soon? Let’s chat!