How your credit score affects your mortgage rate

Home buying can be a confusing, stressful, exciting and fun process. With mixed emotions, you may have a bunch of questions including how much you should worry about your credit score when getting a mortgage.

We’re here to help you buy a home! We share how a credit score affects your mortgage rate with examples, tips and resources to get you on the right track.

How much does a credit score affect your mortgage rate?

Multiple factors can impact your mortgage interest rate including your loan amount, debt-to-income ratio, down payment, location, property type and use, and your credit score. (Whew! That’s a lot of factors.) If your credit score needs work, that’s ok! Your score is just one of many factors. Yes, your score will influence your rate, but you can improve your credit score with some hard work.

Before you apply for a mortgage, it’s helpful to know your credit score up front. You can verify your score for free every 12 months. Visit annualcreditreport.com to access each of your reports from the three credit bureaus. (This is the only site for completely free credit reports.)

Why do mortgage lenders look at your credit?

Lenders pull your credit to see how you will likely handle future payments. Your credit score is partially determined by your past and current payments on loans, rent, bills and credit cards.

A complete credit report tells the lender how risky the new loan will be by sharing things like your payment history, types of loans you’ve paid, new inquiries for a loan you’ve taken out, how long you’ve had credit, and the amount of debt you have.

Based on your score, the lender will adjust the interest rate. In general, excellent credit scores help bring down interest rates.

How mortgage interest rates can vary by credit score

Everyone wants the best mortgage interest rates but, if you don’t pay points up front, those rates often go to those with very good and exceptional credit. So, you may be wondering, where do I fit in?

Credit scores range from 300 to 850.

• A FICO score of 800 or higher is considered excellent credit or exceptional credit.
• A FICO score between 800 and 740 is considered very good credit.
• A FICO score between 670 and 739 is considered good credit.
• A FICO score between 580 and 669 is considered fair credit.
• Scores of 579 and below are considered poor credit.

A change in your credit score could change your interest rate and monthly payment. Here’s a simplified example: You plan to put 20% down on a new single-family home priced at $500,000. Your 30-year fixed-rate loan amount will be $400,000 and you aren’t paying points.

• With a 760+ credit score, the lender gives you a 3.125% rate.
• With the same lender and a 690 “good” credit score, your rate could jump to 3.375%.
• With a 650 “fair” credit score, your rate could jump higher to 3.750%.

Why you want a nice credit score for a mortgage

In the example above, your monthly payment goes up slightly as your interest rate increases. The numbers might not seem alarming because your interest rate changes by less than a percent. However, over the life of the loan, the amount of interest paid is a difference of tens of thousands of dollars.

To make a long story short, your credit score matters.

Pro tip: You can use Alliant’s mortgage rate calculator to get a better idea of how your interest rate will change based on your credit score.

Tips to boost your credit score for your mortgage

Everyone will want to give their credit score a bit of a boost before closing their mortgage. Here are some easy ways to build your credit score.

Continue to make payments on time. Payment history makes up 35% of your credit score, which is a really big deal! One missed payment near your closing date could drop your credit score. That’s why you’ll want to make at least minimum payments on time, each time a due date comes up. This rule is true for all your loans (personal loans, car loans, credit cards, etc.).

Up your credit limit on your credit cards. Credit utilization is the ratio of your outstanding balances and your total line of credit. For example, if you have two credit cards, with a total balance of $5,000 and a total credit limit of $15,000, your credit utilization is 33%.

A rule of thumb is to keep your credit utilization below 30% and a quick way to do that is to up your credit limit.

Let’s look at the same example again. If you keep the balance at $5,000 but increase your total credit limit to $20,000, your new credit utilization is 25%.

Requesting a credit limit increase will typically require a quick phone call to your credit card issuer. They may approve the increased limit in a matter of minutes, potentially upping your credit score by lowering your credit utilization ratio.

Keep your oldest credit card open. Age of credit is another factor that will influence your credit score. Don’t close your oldest credit card at this time. That way you keep your “age of credit” as high as possible for you.

Learn more about credit scores. One of the best ways to improve your credit score is to get to know how a credit score is calculated and how to build credit. Continue to do some research and never stop learning!

Want to read more about home buying? Check out these helpful articles!

• Will a new credit card affect a mortgage application?
• How much house can you afford?
• Six common mortgage myths, busted
• Navigating mortgage options for first-time homebuyers