Your credit score affects mortgage, more
Becoming a homeowner has become increasingly more challenging for many, with monthly housing payments recently hitting a record high of $2,563 — a 29% increase from 2022. Sky-high mortgage rates, which are expected to keep climbing, have left both homebuyers and owners feeling increasingly pessimistic about the housing market outlook.
So, if you’re in the market for a mortgage or a refinance, it’s more important now than ever to ensure you can secure the lowest mortgage rate possible. One way it can be done is by prioritizing a good credit score.
[Ed. Note: A high credit rating can also reduce your homeowners’ insurance, car insurance and mobile phone contracts. In addition, according to NerdWallet, “senior housing, assisted living and continuing care retirement communities also may use credit histories or scores to evaluate applicants.”]
Credit score impacts mortgage rates
Lenders take into account a variety of factors when determining the interest rate on your mortgage, including down payment, loan term and the price of the property.
However, the biggest factor determining your mortgage rate is your credit score. Most lenders will take into account your FICO score, which can range from 300 to 850.
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or lower: Poor
To qualify for a mortgage loan, you’ll likely need a score of at least 620. However, having a higher score can ease the financial burden of a mortgage, as it can help get you lower rates. And the knock-on benefits continue — securing a low mortgage rate can help lower your monthly payments substantially, according to this data from MyFICO:
Say you start with a credit score of 620-639. Here’s how much you’d save over the course of your 30-year fixed mortgage of $350,000 by boosting your credit score:
—If your score changes to 640-659, you could save an extra $47,086.
—If your score changes to 660-679, you could save an extra $83,473.
—If your score changes to 680-699, you could save an extra $101,343.
—If your score changes to 700-759, you could save an extra $116,000.
—If your score changes to 760-850, you could save an extra $134,220.
How to improve your score
Your credit score matters to lenders because it shows them how likely you’ll be able to repay your loan. If you have a higher credit score, lenders won’t see you as a risky borrower.
And while you can still get approved for a mortgage with a bad credit score, you won’t be able to secure the lowest rates possible. If you want to save on your mortgage rates, try these steps to boost your overall credit score before applying.
Check your credit report: Before applying for a mortgage, get a copy of your credit report. [Ed. Note: You can request one free copy of your credit report each year from each of the three major consumer reporting companies — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com.]
You’ll be able to see a complete rundown of your credit history, helping you identify areas of your credit that are hurting your score, while also checking for any inaccuracies in the report.
Having errors on your credit report is more common than you may think, so it’s important to get those fixed by filing a dispute.
Make on-time payments: Payment history is the largest factor affecting your credit score, accounting for 35% of your total score. Because of this, it’s vital to always make payments on time, as missing payments can significantly decrease your score.
Pay off credit card balances: Credit utilization is the ratio between any debt you have compared to your total credit limit, and it makes up 30% of your overall credit score. Therefore, keeping your credit utilization as low as possible can help you up your overall credit score. A good rule of thumb is to keep your credit utilization below 30%.
© 2023 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.