How credit score affects mortgage rates
Quick insights
- A higher credit score often leads to lower mortgage rates, which can reduce your monthly payments and total loan costs.
- Different mortgage types and lenders have different minimum credit score requirements, with conventional loans usually requiring at least 620.
- Improving your credit score before applying, through steps like paying down debt and correcting report errors, may help you qualify for better loan terms.
Your credit score is one of the most important factors lenders consider when determining your mortgage rate. A higher score can help you qualify for more competitive rates, potentially lower your monthly payments and save you money over the life of your loan.
In this article, we will discuss how your credit score influences mortgage pricing, and why even small improvements could make a significant difference. No matter where your credit stands today, understanding its impact on mortgage rates puts you in a position to plan ahead, improve your financial profile and prepare to buy a home.
How mortgage lenders use your credit score
Mortgage lenders use your credit score as a snapshot of your financial reliability. The figure by itself represents many details within your credit profile. A higher credit score suggests to lenders that you’ve consistently paid your debts on time and managed credit responsibly.
Your credit score influences more than just loan approval; it plays a crucial role in the rate you’re offered and the overall cost of borrowing. This lowers the lender’s perceived risk, meaning you’re more likely to be offered favorable loan terms and interest rates. Generally speaking, if you have a higher credit score, you could be able to secure a lower mortgage rate.
What credit score do you need to buy a house?
There’s no one-size-fits-all answer because mortgage lenders have different approval criteria; however, your credit score tends to affect which types of loans you may qualify for and what interest rate you’ll receive. Here's how different credit score ranges can impact the homebuying process:
800-850: Exceptional
- What it means: You have top-tier credit and an excellent history of managing debt.
- What you can expect: You will likely qualify for the most competitive mortgage rates, favorable loan terms and a wide variety of lender options.
- Typical mortgage types: Conventional loans with low down payments and minimal fees.
740-799: Very good
- What it means: You have a strong credit profile with consistent on-time payments and low credit utilization.
- What you can expect: You will likely receive access to low interest rates and flexible loan terms, though just slightly higher than those offered to borrowers in the “exceptional” range.
- Typical mortgage types: Conventional loans and refinance options with excellent pricing.
700-739: Good
- What it means: Your credit is solid and considered low risk by most mortgage lenders.
- What you can expect: You may qualify for favorable rates, though not the lowest available. You’ll still have access to most loan products.
- Typical mortgage types: Conventional or FHA loans with competitive rates.
650-699: Fair or average
- What it means: You’re in a transitional zone because you are qualified but with a higher perceived risk.
- What you can expect: You may still qualify for a conventional mortgage, but you might face higher rates, stricter underwriting or larger down payment requirements.
- Typical mortgage types: FHA loans or conventional loans with compensating factors (such as a higher income or bigger down payment).
620-649: Minimum for conventional loans
- What it means: This is generally the minimum required for conventional loans backed by Fannie Mae® or Freddie Mac®.
- What you can expect: Approval is possible, but maybe with a higher rate and additional conditions. Your debt-to-income (DTI) ratio and other factors will be closely reviewed.
- Typical mortgage types: Conventional loans with a larger down payment or government-backed loans (FHA loans and VA loans), which generally have more flexible credit guidelines.
580-619: Low credit, still possible
- What it means: Your credit score is below the typical cutoff for conventional loans, but some loan programs may still be within reach.
- What you can expect: You could still get a home loan with low credit. You may qualify for an FHA loan with a 3.5% down payment, although rates may be higher, and mortgage insurance will likely be required.
- Typical mortgage types: FHA loans, depending on the lender. The minimum credit score for FHA loans is 500 with a 10% down payment, or 3.5% down payment with a score of at least 580.
500-579: Poor credit
- What it means: This range indicates major credit challenges, such as recent delinquencies or high debt levels.
- What you can expect: You may still qualify for an FHA loan, but a 10% down payment is typically required, and many lenders may set higher minimums.
- Typical mortgage types: FHA loans (if other aspects of your financial profile are strong).
Below 500: Not eligible for most loans
- What it means: This is the lowest possible credit score range.
- What you can expect: You may want to take steps to improve your credit before applying. This can mean paying down debt, making on-time payments and correcting any credit report errors.
- Next step: You may want to consider building or increasing your credit score before applying for a home loan, and talk to a mortgage lender for suggestions.
How to improve your credit score before applying for a mortgage
Before applying for a mortgage, improving your credit score can help you qualify for better rates and save substantially over time. Here's how you could boost your credit score effectively:
- Check your credit reports and scores: Start by reviewing your credit reports for accuracy. Look for any outdated accounts, incorrect balances or unfamiliar activity. Disputing and correcting errors can help ensure your credit score reflects your true financial standing.
- Reduce debt-to-income ratio: Your debt-to-income (DTI) ratio plays a critical role in both credit scoring and mortgage approval. You can reduce your DTI by paying off high interest credit cards, avoiding new large purchases and increasing your income before applying.
- Consistent payment history: Your payment history makes up 35% of your credit score. A single missed payment can cause a noticeable drop. To help build or maintain a strong credit score, you can set up auto-payments, use reminders or calendar alerts and keep all accounts current.
- Limit new credit inquiries: Each time you apply for new credit, a hard inquiry is added to your report. Too many within a short period can temporarily lower your score. Avoid opening new credit cards or financing large purchases (like a car or furniture) while you’re mortgage shopping.
In summary
Your credit score is an influential factor in determining whether you qualify for a home loan and the mortgage rate you’re offered. A higher credit score can open the door to lower interest rates, more favorable loan terms and long-term savings. A lower credit score may limit your options or increase your borrowing costs.
Understanding where your score stands and taking steps to improve it can make a major difference in your homebuying journey and financial future.
