Getting a high interest rate on your mortgage can go a long way toward making your monthly mortgage payments affordable. And having a good credit score can help you earn that high interest rate on your mortgage.
Here we take a closer look at how your credit score It can affect your mortgage, including interest rates, down payment requirements, and more.
Lenders require a minimum credit score
Before finding out how good credit can save you money on a mortgage, it’s important to know what your mortgage lender needs. A pioneering scoring model created by Fair Isaac Corporation, FICO credit scores range from 300 to 850.
According to Credit Karma, many lenders minimum credit score 620 Federal Housing Administration insured mortgages require a minimum credit score of 580 to qualify for a traditional mortgage.
Knowing your credit score before you apply for a mortgage can help you know what to expect when talking to your mortgage lender.
Federal law allows consumers to obtain one free credit report each year. Annualcreditreport.comThis information is provided by Experian, TransUnion and Equifax, the three largest US credit bureaus.
” Expert Tips:Want to buy now?Be prepared to have your offer accepted at home Get pre-approved for a mortgage before looking for a home.
Higher credit usually means higher interest rates
The average US 30-year fixed mortgage interest rate was 7.08% this week, above 7% for the first time since 2002, said Freddie Mac.FMCC) said in a report on Thursday. You need stellar credits to get that rate.
“Among the price improvement and add-on variables are applicant’s FICO score,Shmuel Shayowitz, President and Chief Loan Officer of Approved Funding in River Edge, New Jersey, said: “Banks use the lower score of all mortgage applicants to determine what the interest rate additions or improvements are.”
Consider these financing scenarios when home prices are $384,800 (September US median). Assuming a 20% down payment, homebuyers can avoid the private his mortgage insurance required for a Fannie Mae or Freddie Mac loan with a smaller down payment.
For “excellent” credit, meaning a score of 740 to 850, the monthly payment would be $1,970. This amount includes principal and interest only and excludes other charges such as taxes and insurance. MSN.com Mortgage Calculator.
If your credit score is between 700 and 739, that payout increases to $2,065. If he owns the house for 10 years, the difference is $11,400. After living in the house for 30 years, the difference is $34,200.
If you only have a 10% down payment ($38,480 in this scenario), you have additional problems before you qualify for a mortgage. If you have a traditional loan, you must pay for private mortgage insurance or PMI. In this example, that would be about $140/month.
The average cost of a PMI, broken down into monthly payments, is 0.58% to 1.86% of your mortgage amount per year, according to the Urban Institute. Again, this is based on your credit score. The higher your credit score, the cheaper your PMI.
The higher the credit rating, the lower the fees
along with down payment, Many mortgages include various fees such as initiation fees, processing fees, and title fees. These fees can be higher for borrowers with lower credit scores.
Both Fannie Mae and Freddie Mac have loan-level pricing adjustments (LLPAs) based on credit scores, Shayowitz said.
“People with a credit score of 699 compared to a credit score of 740 will be charged an additional 1.25% fee with a 20% down payment, which in some cases equates to about three-eighths ‘ he said. “Similarly, a lower down payment could result in a 1.25% price (fee) adjustment if your credit score is 679 versus 740 or higher.”
High credit may improve approval probability
Mortgage lenders also consider a borrower’s credit score when approving a loan application.
“Keeping your score as high as possible will definitely save you money and help prevent loan disapprovals,” says Shayowitz. “We are seeing more frequent examples of borrowers with scores in the 660 to 700 range failing to get their applications approved due to Fannie Mae and Freddie Mac automated underwriting.”
How to improve your credit score to save on your mortgage
If your credit score isn’t going the way you want it to, there are steps you can take to improve it. According to Experian, these include:
Make payments on time.
Pay off overdue accounts.
Reduce credit card debt.
Correct the error on your credit report.
Avoid applying for a new credit account, as multiple new inquiries in a short period of time can negatively impact your credit score.
Be careful to boost your credit score It won’t happen overnight, so if you want a higher credit score, take steps to raise it right away. There is a possibility.
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