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How Do Credit Scores Affect Your Mortgage Rate

A young woman uses her credit card to pay off her bills. Credit scores can affect your mortgage interest rate.

Credit scores are among the most critical factors that lenders look at to assess a homebuyer’s loan qualifications. Credit scores can affect the mortgage interest rate homebuyers receive from their lender.

WHAT DETERMINES A MORTGAGE RATE?

Many factors affect your mortgage rate, especially your credit scores. Here are a few of the most common and significant factors:

  • Property Type: condos and multi-unit dwellings (2 – 4 units) usually have higher interest rates associated with them than single-family dwellings.
  • Property Use: Investment properties have higher rates than owner-occupied and primary residence properties.
  • Down Payment: The bigger the down payment, the lower the rate, in most cases.
  • Loan Amount: Small loans (under $150,000, for example) can have higher rates, as can large jumbo loans (over $3 million, for example). Also, “Low Balance” conforming loans under $484,350 will have lower rates than “High Balance” conforming loans (from $484,350 to $726,525).
  • Credit Scores: Credit scores are one of the most significant influencing factors. Credit scores can significantly affect rates. A homebuyer with a 750 mid-score might have a rate as much as 1% lower than a borrower with a 670 mid-score.

PERFECT CREDIT SCORES SERVE NO PURPOSE

But other than granting bragging rights, perfect scores serve no purpose. In the mortgage realm, the highest score conforming (Fannie and Freddie) homebuyers can benefit from is 740. For jumbo loans, the highest score from which a homebuyers can benefit from is 780. Underwriters don’t go easier on borrowers with 850 scores, and their rates are not any lower either.

TIPS TO IMPROVE CREDIT

If you’re unsure how to repair your credit score, these tips are a practical guide for establishing, maintaining, and improving your credit score for mortgage approval.

  1. Prove you are responsible for both types of large-scale credit. The most effective credits for your credit score are installment loans (auto loans, student loans) and revolving credit (credit cards).
  2. Pay down your credit card expenses. The gap between your card’s limits and the amount of credit you’re using is something lenders may take into consideration. A good level would be a usage of 30% or less. An even better level would be a utilization below 10%.
  3. Make sure your payments are on time. One of the most crucial things you can do to help your credit score is to pay your bills on time. Oftentimes auto-pay features can help ensure that you never miss a payment.
  4. Use your credit in moderation. You don’t want to deepen the debt you’ve already accrued.
  5. Understand your rights as a consumer. A helpful resource for consumers is the Federal Trade Commission Consumer Information. As a borrower, you can dispute inaccuracies from your credit reports. Credit companies are then required to investigate relevant information. By doing so, inaccurate or derogatory marks on your credit report can often be removed, resulting in your credit score improving. Improving your score can help qualify you for various loan products or lower interest rates.
  6. Avoid possible scams. Advertised services that prey on people with low credit may damage your score instead of relieving your debt. The steps above are a much more effective method of improving your credit.

This blog covers the basics of how credit scores can affect mortgage rates for homebuyers. To learn more about how you can improve your credit score and other factors that influence the mortgage rate for your home loan, you can contact our expert team of Mortgage Analysts. Our team is available 7 days week by phone at (855) 855-4491 or by email at jvmteam@jvmlending.com.


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Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167