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Why Good Credit Matters When Applying for a Mortgage

Your credit score plays a major role in the mortgage approval process; it dictates what types of loans you’re eligible for, how much money you’re expected to put down at closing, your interest rates and your mortgage insurance rates. That’s why, before shopping for the home of your dreams, it’s important to make sure your credit score is in good shape.

What’s the Big Deal About Credit Scores?

At some point during the mortgage approval process, the lender will assign an underwriter to review your financial history, your debt-to-income ratio and your credit score, among other factors. The lender uses this information to determine how likely you are to repay your loan on time. A higher credit score indicates that you have multiple lines of credit open and have consistently made monthly payments on all of them, which demonstrates personal responsibility and that you possess the necessary capital to pay off your loan.

In addition to making you a more attractive candidate for a mortgage, a high credit score comes with benefits such as lower mortgage rates, and, ultimately, lower monthly mortgage payments.

So, what does that look like in practice? We already know that with a great credit score, you have the best chance to lock in a great interest rate. And given the numerous interest rate cuts implemented by the federal reserve in response to the COVID-19, your high credit score can give you an unbelievable rate.  To be safe, here is a breakdown of credit score, APR percentage, expected monthly payment and total interested paid on a 30-year fixed loan of $200,000, based on conservative 2019 numbers.

FICO Score APR % Monthly Payment Total Interest Paid
760 – 850 3.408 $888 $119,628
700 – 759 3.63 $913 $128,560
680 – 699 3.807 $933 $135,776
660 – 679 4.021 $957 $144,611
640 – 659 4.451 $1008 $162,720
620 – 639 4.997 $1073 $186,380

What is Considered a ‘Good’ Credit Score?

Based on the Fair Isaac Corporation (FICO) model — the standard used by most lenders — credit scores range from 300 up to 850. As far as what is a good credit score vs. a bad credit score, the typical ranges are:

  • Exceptional – 800 or higher
  • Very good – 740 to 799
  • Good – 670 to 739
  • Fair – 580 to 669
  • Poor – 579 or lower

Generally speaking, when it comes to applying for a mortgage, the higher your credit score, the better. Most loans require a credit score of 580 or higher to qualify, though certain loan types are more lenient toward lower credit scores (more on that later). A credit score between 620 and 739 puts you in reasonable territory, while a credit score between 740 and 850 is considered top tier. Prospective home buyers with a credit score of 740 and above can expect:

  • Lower APR percentages
  • Lower monthly mortgage payments
  • Less interest paid over time

This top tier is where the rule “the higher, the better” goes out the window. From a lender’s perspective, there’s effectively no difference between a home buyer with a credit score of 740 and one with a score of, say, 800 — both are eligible for the same benefits, including lower mortgage rates. No matter what type or size of loan you see, there is no variance between a 740 credit score mortgage rate, an 800 credit score mortgage rate and an 850 credit score mortgage rate.

The one exception to this is private mortgage insurance (PMI). Lenders typically require PMI from home buyers who have paid less than 20% down. How much you pay in PMI depends on a number of factors, including how much you put down at closing, the terms of your mortgage and your financial status; this last item refers specifically to your credit score. In the world of PMI, an ideal credit rating is 760 and, if you fall into this category, you’re guaranteed the lowest possible PMI rates for your specific circumstances. This difference in PMI rate is effectively the only variance between a 740 credit score mortgage and an 800 credit score mortgage.

Can I Still Get a Loan with a Low Credit Score?

As mentioned above, most loans require a credit score of 580 or higher, though a few loan types — specifically government loans — are more lenient.

Keep in mind that lenders evaluate low credit score mortgages on a case-by-case basis and that if you apply for a home loan with a low credit score, you’ll likely have to pay higher interest rates and make higher overall monthly payments. If you have a low credit score and have your heart set on home ownership, it’s in your best interest to focus on raising your score before applying for a mortgage.

How Can I Raise My Credit Score?

There are a few easy ways you can help improve your credit score.

  1. Focus on making your monthly payments on time to avoid derogatory marks and collections.
  2. Utilize your credit wisely and maintain a low balance — you should never have a credit card balance that is more than 30% of your available credit and if you can maintain a balance of 20%, so much the better.
  3. Pay off debt — if you have any derogatory items or past due accounts, call your creditors and square up on bad debt as soon as possible.

The key to maintaining a low balance is to make small purchases, ideally on items you’re going to buy anyway (e.g. food, gas, etc.), and pay them off consistently. Keep credit lines open and active. Contrary to what you might believe, the more lines you have open, the better, so long as you make payments on time. If you have trouble opening new lines of credit, consider applying for a secure credit card.

At Blue Water Mortgage Corporation, we understand just how important good credit is for mortgages. Our team of experienced mortgage brokers has the knowledge and expertise necessary not only to guide you through every stage of your mortgage application, but also to secure the most competitive mortgage rates and monthly payments. If you have any additional questions about how to improve your credit score, we’re connected to a vast network of credit repair professionals who can help get you on track. Contact us today to discuss how we can help you get the ideal terms on your monthly home mortgage payment or to try out our credit analysis tool.

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