What is a credit score and how does it affect my mortgage rate?

One of the first questions I hear from first-time homebuyers is “Does my credit score really affect my mortgage loan application?” Though it’s only one component of your mortgage lender’s decision, it’s an important one. Your credit score has a direct influence on your mortgage interest rate, so it matters in a way you can count in dollars and cents.

To help you better understand credit scores and how they factor into the mortgage loan process, I’ve prepared this short Q&A.

What’s a credit score?

People tend to confuse a credit score and a credit report. They are two different things. Your credit score is calculated based on the information in your credit report. A higher score reflects a better credit history, which can make you eligible for lower interest rates.

How is my credit score determined?

Your credit score is calculated most often with the FICO scoring model and is derived from the information on your credit reports, which are compiled by credit reporting companies. Your reports include a history of your payment habits with borrowed money.

Most mortgage lenders look at scores from all three major credit reporting agencies – Equifax, Experian, and TransUnion – and use the middle score for deciding what rate to offer you.

What is considered a high credit score?

FICO scores range from 300 – 850, with higher being better. Generally a score of 720-750 or above will get you the best interest rates.

If you score about 720 or above, you’re rated as excellent. As you move down toward 700, your score is considered good. A score of 680 is considered average. If your score is closer to 640, then you might have trouble getting a conventional mortgage.

Even if your score is under 680, you can qualify for certain loans designed for first-time homebuyers or low-to-moderate income borrowers. Read more about those on A Mortgage Boutique’s website.

Can I get a mortgage if my credit score is not in the excellent or good ranges?

Yes. In fact, some loan programs are specifically designed for those who don’t have the highest scores. For a government-insured FHA mortgage, you may be able to have a score as low as 500. VA loans don’t require a minimum FICO score, although a score of 620 or more is considered favorable by lenders. Rural development loans usually require a minimum score of 640. Learn more about these mortgage loans.

How does my credit score affect my interest rate?

Along with a low debt-to-income ratio and a strong financial history, you’ll need a high credit score to get the lowest mortgage rates. Without a high credit score, you won’t qualify for the best mortgage rates available, which could mean you’ll end up paying more money over the term of your mortgage.

If I’m buying a home with a spouse or partner, will both our credit scores be factored into the lending decision?

Yes. Even if you are sharing finances, both credit scores will be taken into account if you jointly apply for a loan or mortgage. To ensure both credit scores are high, couples should work together to keep current accounts paid on time and reduce your overall debt loads.

How can I check my credit score?

Monitoring both your credit report and credit score helps you keep tabs on your credit health, so you’ll know when you have established adequate credit to apply for a home loan. Also, regular monitoring gives you the opportunity to catch incorrect or fraudulent information.

The Fair Credit Reporting Act (FCRA) requires each of the three credit bureaus to provide consumers with one free credit report per year. To get your free reports, visit AnnualCreditReport.com. These reports, however, do not include a credit score.

Once you select a mortgage company like A Mortgage Boutique, your home loan advisor can help you determine a more accurate FICO credit score — the score that will be used to qualify you for a home loan. Need something about the pre-qualification form here?

How can I improve my credit score?

• Make on-time payments, including rent, credit cards, and car loans.
• Keep your spending to no more than 30% of your limit on credit cards.
• Pay down high-balance credit cards.
• Check for any errors on your credit report and work toward fixing them.
• Work with a credit counselor or a lender to build your credit.

Jeannine Dalton is a personal home loan shopper with A Mortgage Boutique, headquartered in Murfreesboro, TN. She uses her more than 30 years of experience in the mortgage industry to help homebuyers secure home loans easily and quickly. Jeannine can be reached at 615-622-7600 or jeannine.dalton@amortgageboutique.com.