Does Credit Score Affect Mortgage Rate?

There’s a single three-digit number that plays a crucial role throughout your life. This number, your credit score, is relevant in many areas, but nowhere is it more important than in taking out a loan, including a mortgage. The relationship is simple: The higher your credit score, the lower your interest rate.

The reasoning makes sense: a good credit score tells lenders that you're financially responsible, so you'll likely stay current on your payments. This makes you a lower risk for them. The lower your score, lenders reason, the higher the risk that you won’t pay back your debt. 

However, it’s important to remember that credit score is just one metric in the complicated equation that makes up your mortgage rate. A credit score is important, but it’s not everything. 

But what are the other elements, and how important is the credit score? Read on to find out.  

Why Your Credit Score Matters

Before we get into the details, let’s define exactly what a credit score is. Essentially, it’s a number that provides a numerical “grade” to your financial health and helps lenders assess how likely you are to repay your debts.

These factors are considered when your credit score is tabulated:

• Your payment history
• How you use your available credit
• The length of your credit history
• How many new credit accounts you have
• The different types of credit you use

Lenders typically use the median figure from the three major credit agencies (Experian^TM, Equifax^® and TransUnion^®) to arrive at the final figure. The score subsequently factors into their decisions about whether to lend you money and at what interest rate.

This score can have a deep impact on your financial future, so it is in your best interest to raise it as high as possible.

How Mortgage Lenders Use Credit Scores

Determining someone’s level of responsibility can be a difficult task, which is why lenders have created the concept of a credit score. A higher credit score indicates a person has exercised good financial judgement, so odds are they will continue to exhibit sound behavior.

Conversely, someone with a low credit score might not have used the best judgement in their financial lives, and thus is a higher risk for a loan. To offset that risk, lenders typically charge higher interest rates.                                                                                                         

Consider this example: say a lender is evaluating two loan applications. They will typically opt for the applicant with the higher credit score because it indicates a higher likelihood of getting repaid.

One’s credit score is a factor in the mortgage rate that’s charged, which is the amount of interest your lender charges for the mortgage you take out. But there are other elements that factor into this rate as well, including your income, the amount of your down payment, the inflation rate and bond yield fluctuations.

To complicate things further, different credit scores provide different levels of weight to different factors, which are considered for different types of loans. For instance, mortgage lenders typically use the three FICO^® Scores from Experian™, Equifax^® and TransUnion^®.

When Lenders May Not Use Credit Score

While credit score is important, it’s not the only factor taken into consideration. Some lenders will look to other indicators including your income, savings and history of paying rent and utilities on time. This is especially relevant for people who haven't built up much credit history or prefer not to use credit cards.

Mortgage Types Where Credit Matters Less

Sometimes credit scores play a smaller role in a lender’s decision. Government-backed loans, such as FHA and VA mortgages, typically have more relaxed credit requirements. Also, programs like USDA rural loans tend to rely more on one’s income stability and monthly expenses than on a credit score.

What Credit Score Do You Need to Get a Mortgage?

Credit scores have a range that spans from 300 to 850. The full range typically breaks down into five rough categories:

• Exceptional: 800 – 850
• Very Good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 300 – 579 

That said, different loans bring varying thresholds for approval. As a general rule, most lenders prefer not to work with borrowers whose scores fall in the Fair to Poor ranges. But this is not etched in stone, and the credit range can vary by type of loan. Here are some different loan types and their respective minimum scores:

• Conventional: 620
• FHA:
• 3.5% down payment: 580
• 10% down payment: 500 – 579

• VA: 580
• USDA: No industry standard, but most lenders require 640
• Jumbo: 680

How to Improve Your Credit Score

A low credit score can feel like a major issue, especially when you're hoping to make a big purchase, like a house. But don't lose hope. With some focused effort and smart habits, you can turn things around. Be aware that this will take some time.

Here’s how to improve your credit score: First, get ahold of your credit reports to see if there are any errors. You can buy it from one of the major credit reporting bureaus, though you are eligible for a free annual report at AnnualCreditReport.com. Credit card companies and banks often also offer free credit reports, so be sure to check what’s available for you.

Once you’ve received your report, go through it thoroughly and look for mistakes. That’s the fastest way to improve your credit score — addressing errors (and they do happen) can help you increase your score. 

Some of the most common errors include:

• Debts that belong to someone else are incorporated into your report
• Previously closed accounts, or fully paid loans, appear as still active
• Payments incorrectly flagged as late or missed — despite timely payment
• Credit utilization information that hasn't been properly updated

If your report is correct, there are other ways you can get your score to 700, and maybe even 800.

Another critical — and relatively fast — way to raise your score is to make minimum payments on all of your accounts every month. Also, try to pay off your outstanding credit card balances before they’re due. This will lower the amount you pay in interest and free up money that can be used to pay down other debts.

It’s important to not close any credit cards that you don’t use. This lowers your available credit and increases your revolving utilization percentage, which affects your credit score. Instead, here’s a hot tip: use them sparingly, like for a few cups of coffee, and pay your bill off immediately. And with just a few lattés, your credit is improved.

Credit Score FAQs

It's only natural to have questions about your credit rating and its impact. Here are some of the most common credit score questions to keep in mind as you navigate the mortgage process:

Can I get a mortgage with a low credit score?

It is possible to get a mortgage if you have a lower credit score, but you'll likely incur higher interest rates, and you may need to put together a larger down payment. There are other ways of buying a house with less-than-pristine credit, though, including different loan types that have varying credit thresholds.

Will I get a better interest rate if I have a higher credit score?

In a word: Yes. A higher credit score typically results in lower interest rates because lenders view you as a lower risk. So, because you're a lower risk, the lender doesn't have to charge higher interest rates to protect their loan investment.

Which credit score is most important when buying a house?

Most mortgage lenders use the FICO^® Score model and will typically look at scores from all three major credit bureaus. They generally focus on FICO^® Score versions 2, 4 and 5, or more simply, Experian™, Equifax^® and TransUnion^®.

What is the minimum credit score needed to buy a house?

The minimum score varies by loan type and lender requirements: FHA loans may go as low as 580, while conventional loans typically require at least 620. That said, some lenders may offer mortgage loans to borrowers who have a score as low as 500, though terms will likely vary significantly.

The Bottom Line

Having a good credit score is important for many reasons, but it’s especially crucial when you try to buy a home. Throughout the lending process, this three-digit number serves as a snapshot of your financial habits, showing lenders how you've handled credit and debt over time.

The better your track record of on-time payments and smart credit use, the more likely you are to receive favorable interest rates. This, in turn, can equal big savings over the life of your mortgage.

However, not everyone has great credit. (Hey, it happens.) Thankfully, a less-than-perfect score doesn't rule out homeownership. If you start taking steps to improve your credit before applying for a mortgage, you can get better loan terms down the road.

If you’re ready to take the next step toward homeownership, start your mortgage approval process today!