How Does Credit Affect Your Rate?The most influential determinant of your mortgage rate is your credit score. The higher your credit score, the lower the interest rate on the mortgage.
How credit scores affect mortgage rates Borrowers with high credit scores tend to get lower interest rates on mortgages than borrowers with low credit scores. * A credit score of 740 or higher qualifies for the best interest rates from most lenders. * It is more difficult to get a mortgage with a credit score under 620, but definitely not impossible * The difference between the best and worst rates can vary by a full percentage point and a half. Not only is a high credit score vital in getting a low mortgage rate, it influences whether you can get a home loan at all. Buyers below a certain threshold, typically a FICO score of 620, will have a difficult time obtaining a mortgage. But, that is the advantage of working with a mortgage broker we can go as low as 580 FHA at 3.5% down or VA with 0% down. A credit score of 740 or more should qualify for the best mortgage rates from most lenders. Depending on the lender, the mortgage rates offered to the highest and lowest credit tiers can vary as much as a 1-1.5%. One percentage point DOES makes a BIG difference, short and long term Example: Monthly principal and interest payments on a 30-year fixed-rate mortgage for $200,000. Interest rate of 4% would be a payment (principal + interest) of $954.83 Interest paid over the life of a 30 year loan @ 4% = $143,738.80 Interest rate of 5% would be a payment (principle + interest) of $1,073.64 Interest paid over the life of a 30 year loan @ 5% = $186,510.40 That's an annual savings of almost $1500 not to mention, in interest alone your saving OVER $40,000 over the life of the loan! What Lenders Look For Lenders prefer borrowers with low balances (under 30% of card max), a long history of on-time payments and a mix of credit utilization -- for instance, a car loan and a couple of revolving accounts such as credit cards. Lenders look at several variables on the credit report: outstanding debt, the outstanding debt relative to the total available debt; the length of the credit history, and the pursuit of new credit -- how many inquiries are on your report. |
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