Homebuyers

Credit Tips: Why Does Your Credit Score Matter for Mortgage Rates?

Are you thinking about buying a home or refinancing your current mortgage? If so, one of the biggest pieces of the puzzle will be the interest rate you are eligible for on your loan. The interest rate helps determine how much your monthly payment will be.

But how is your interest rate determined? Well, several factors are part of the equation, but one of the biggest ones is your credit score.

What is a Credit Score?

In the simplest terms, a credit score is a number that represents how good you are at meeting your financial obligations.

Things like outstanding debts, payment histories, and other factors contribute to your credit score. The better you are at managing your money, the higher your credit score will be.

Why Does Your Credit Score Matter for Mortgage Rates?

When lenders determine your interest rate, they look at your credit score to gain insight into your financial past. The better you are at meeting your financial obligations, the higher your credit score. And the higher your credit score, the more likely it is that you will receive a lower interest rate.

That’s because in the eyes of a lender, having a higher credit score means you are less likely to default on your loan. It’s an indication that you are sound financially. Put simply, if you have shown in the past that you can meet your financial responsibilities, you have a better chance of receiving the most competitive interest rates available.

A lower interest rate translates to a lower monthly mortgage payment, which saves you money over the life of your loan. However, all is not lost with a less-than-perfect credit score as there are loan programs that have a lower credit score threshold for qualification.

Which Credit Score is Used to Determine Your Mortgage Rate?

Typically, a mortgage lender will use what’s known as a tri-merge credit report. This unique report provides the lender with detailed information and scores from all three major credit bureaus combined into a single merged report.

When using a tri-merge credit report, it’s common for lenders to use the middle of the three scores. When you have more than one borrower, lenders will use the lowest of all the middle scores for qualification purposes. 

Tips on How to Improve Your Credit Score

If you have a less-than-perfect credit score, you may want to consider improving your credit score so you can get the most competitive interest rates available.

Here are some tips that may help boost your score:

• Review your credit report for errors. You may request a free credit report every year from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion – through AnnualCreditReport.com. However, due to the COVID-19 pandemic, consumers can now get a free copy of their credit report every week, through at least April 2021. If you find inaccurate or missing information, report it to the credit bureaus immediately so the issue can be resolved.

• Reduce any debt you owe on your credit cards. Your credit card balances should ideally be below 30% of your credit limit.

• Make sure to pay all your bills on time. Making your payments promptly is a contributing factor to your credit score. A late payment will remain on your credit report for years, but the impact on your score will dwindle over time.

• Don’t close any credit cards. A closed account will remain on your credit report and could be a deciding factor when calculating your score.

• Don’t apply for any new lines of credit. Taking out new debt or large loans could lower your credit score.

How Does a Mortgage Affect Your Credit?

It’s also important to know what happens to your credit when you apply for a mortgage. Be prepared to see your credit score temporarily drop by a few points. This happens any time you apply for credit, but the inquiry can disappear after two years. Also, as you make your mortgage payments on time every month, it’s possible to experience an increase in your credit score.

Are you ready to move forward with your new home loan? Our experienced mortgage professionals will help you determine which loan program is right for you based on your credit score. Contact us today!