How Does Your Credit Score Affect Your Mortgage Rate

It’s no secret that credit plays a role in whether you qualify for a mortgage. In fact, one of the first things lenders do when someone applies for a home loan is check their credit score. The good news is that you don’t need a perfect score to get a mortgage. The bad news is that a not-so-perfect score can be costly. This is because your score doesn’t only affect your approval status, it also impacts your home loan interest rate.

To be fair, this isn’t the only factor affecting home mortgage rates. Lenders also take into account your down payment and your debt. All the same, your credit score provides us with an overall picture of your credit risk.

How Mortgage Rates are Calculated?

Three people earning the same income may get approved for the same mortgage. Yet, they don’t receive the same 30-year mortgage rate.

Why?

Simply put, mortgage rates are based on risk, with many lenders using a pricing grid to determine a borrower’s actual home loan interest rate.

Applicants with the highest credit scores have an excellent record of paying their bills on time. They’re less likely to default, so lenders can afford to offer them the most favorable rates.

On the other hand, the risk of default increases in applicants with weaker credit scores. And unfortunately, the cost of a weaker score is a higher rate. Even when their more recent credit history is okay—which explains their ability to qualify for a mortgage in the first place—they still have a lower level of creditworthiness.

How to Get the Best Online Mortgage Rates?

Keep in mind that a higher mortgage rate also results in higher mortgage costs—a big reason to boost your score before applying for a mortgage. For example, if you qualify for a lower rate, this will result in a lower payment (and more money in your pocket each month)!

Since mortgage rates are based largely on credit scores, how can you get the lowest rate today?

Pay your bills on time. Your payment history makes up 35% of your credit score, so always pay your bills—before or on your due date.

Pay down credit card balances. As a general rule of thumb, your credit card balances should never exceed 30% of your credit line. Come up with a plan to pay off this debt (and others). Pay more than your minimum, stop using the card, negotiate a lower rate, and pay off new charges in full each month.

Check your credit report. Credit report errors can lower your credit score, hurting your chances of getting the best mortgage rates. Get your report from AnnualCreditReport.com. Carefully examine your reports and dispute any inaccuracies.

Don’t apply for credit unnecessarily. Each credit inquiry can reduce your credit score by a few points. Only apply for credit when absolutely necessary.

Ready to make your home loan dream a reality? Blue Spot Home Loan can help you find the right mortgage for your situation. Give us a call or fill out the contact form today to get started.