Last Updated on September 17, 2020 by Andrew Lee
Borrowers who have a high credit score qualifies for much better mortgage interest rates than their peers who have a less-than-stellar credit score. People who fall in the latter category spend more over the life of their home loan. Even if the rates are at their historic lows at the moment, interest payments can quickly add up, especially for those who plan to apply for a 30-year fixed-rate mortgage.
Why Lenders Carefully Consider Credit Score
Aside from having a good financial history and a low debt-to-income ratio, a credit score within the good to high range contributes greatly to a borrower securing lower mortgage rates. The main reason behind this is because of the simple fact that lenders want the assurance they’ll get their money back. Because of this, they favor individuals who have shown they can take full responsibility of their finances, particularly when it comes to repaying their debts.
Having a high credit score displays an individual’s capability to meet his/her financial obligations. This applies to past home loans, car loans, and credit cards. Lenders regard high credit scores as a type of evidence that borrowers will pay them back.
Where a Credit Score Comes From
Typically, credit scores are calculated using the FICO scoring model, which come from a person’s credit report. In the United States, the three major credit reporting bureaus include Experian, Equifax, and TransUnion. Lenders obtain pertinent information through these reports, such as loan history and payment habits.
Credit Score Strongly Influences Home Loan Qualification
An applicant’s credit score can determine whether he/she qualifies for a mortgage. Even if a borrower has enough income and assets, if he/she has a poor credit score, the lender can still reject the loan application. Even if people do qualify, they most likely will have to face the consequences of higher interest rates.
Credit Score Ranges
A credit score qualifies as “excellent” if it reaches 720 or higher. A score below this but still within the 700 range qualifies as “good,” while ratings within the 680 is still considered “good.” Scores within these ranges warrant good interest rates. However, a borrower whose credit score is below average or somewhere around 640 or lower will already find it hard to secure a traditional mortgage from loan lending companies.
This is why experts strongly recommend borrowers to polish their credit scores first and do what they can to improve it before applying for a mortgage. Even a slight increase can already help home buyers find a loan with a lower interest rate.
Washington Post: https://www.washingtonpost.com/news/get-there/wp/2016/11/17/heres-how-much-your-credit-score-affects-your-mortgage-rate/
S. News and World Report: http://money.usnews.com/money/blogs/my-money/2011/03/02/how-your-credit-score-affects-your-mortgage