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How Does Credit Affect My Mortgage Rate
Credit can affect not only your mortgage rate but also determine whether or not you can get a mortgage at all, regardless of the rate.
Historically, credit was reviewed manually. An underwriter, the person who issues a mortgage approval, would pore over a credit report looking for any late payments, collection accounts or bankruptcies.
There was no true universal standard for a credit review but a mortgage could be declined if there were at least two late payments in the applicant’s recent history.
Credit Scores
Many times this manual review was also subject to interpretation. Perhaps one underwriter would approve a loan while another would not using the very same credit report. That is until the introduction of credit scores, sometimes called “FICOs,” the acronym for the firm that devised the credit scoring algorithm, Fair, Isaac Corporation back in the mid 1990’s.
Credit profiles are now assigned a three-digit number ranging from as low as 300 to as high as 850. The higher the number the less likelihood of mortgage default. To put it another way, the higher the number, the better the credit, the lower your rate.
Early on, credit scores were less of a determining factor when getting a mortgage. Mortgage rates were not based upon a particular number as long as the loan received an approval. Within the past few years however, this has all changed into what is called “Risk Based Pricing.”
Now, credit scores are not simply a requirement but also can affect not just your mortgage rate but also how much you can borrow in addition to how much you may be required to put down. You can get a mortgage with a low credit score. Don’t let that stop you from contacting a qualified lender to find out exactly where you stand before you go shopping for a home.
Minimum Credit Scores
Most loan programs require a minimum credit score of 620 for a loan approval with the best interest rate options reserved for those whose credit scores are above 740. Lenders utilize a matrix system that evaluates the amount of equity or down payment required in relation to the credit score.
The matrix will help determine your available mortgage rate options and applies to both conventional loans as well as government backed mortgages such as the VA, FHA and USDA loans.
The mortgage rate possibilities can vary by as much as .75% or more depending upon how much equity there will be going into the transaction. For instance, if your credit score is 780 your mortgage rate might be 3.50% with a 20% down payment whereas with that same 20% down and a credit score of 685 your rate would be closer to 3.875% to 4.00%.
Let’s take that into context and appreciate what those mortgage rates actually mean. You are making a mortgage payment each month in dollars and cents, not paying a rate. For instance, on a $250,000 30 year fixed rate mortgage at 3.50% the monthly payment would be about $1,122 while a mortgage rate of 3.875% on that same note would be around $1,175.
Higher, yes. But, not earth-shattering.
Assessing Risk
Risk-based pricing is simply a method of rewarding those with excellent credit and larger down payments while at the same time helping the mortgage lender manage and evaluate its risk on a loan-by-loan basis. All lenders apply this very same matrix from coast to coast.
Certain lenders however may apply their own internal risk-based credit guidelines in addition to the current choices yet typically these additional guidelines apply to additional circumstances such as an investment property or a refinance where the borrower pulls out cash during the transaction.
There are so many myths surrounding credit scores that many times potential homeowners don’t even bother applying for a mortgage at all. Ever. And that’s unfortunate.
No, you don’t have to have 20% down to get a mortgage. Yes, you can get a mortgage with a low credit score as long as you meet the minimum requirements.
Credit scores do in fact impact your mortgage rate but that impact is less than one might think. The rate can go up or down and a lender may require more or less from you in the form of a down payment. If you have questions about whether or not you qualify or what your monthly payment would be then contact one of our expert mortgage loan officers, who can walk you through the entire process step by step.
