Credit scores are an immensely important aspect when lenders decide on a mortgage rate.
While the housing market can establish average mortgage rates across the economy, the specific rate attached to your mortgage will also depend on your personal financial situation.
The biggest factor that will impact your personal mortgage interest rate is your overall financial history, represented as a credit score. Credit scores, usually expressed as a number between 500 and 850, provide an overall summation of a borrower's history of debt management and repaying loans.
Before letting you borrow thousands of dollars to buy a home, lenders will want to make sure you’re willing and able to carry the hefty cost of closing and repaying a mortgage. A credit score helps complete the picture of a borrower’s financial background by taking the length of your debt history, payment patterns, types of credit and other financial factors into account. Creditors will always use your credit score to determine the eligibility of a mortgage application.
If a borrower has a history of mismanaged loans or suffocating credit card debt, their credit score would be low as a result. On the other hand, potential borrowers who demonstrate solid debt management skills and always make payments in a timely manner will have those qualities reflected in a higher credit score.
Here’s a look at how lenders perceive credit scores and what ranges they prefer for mortgage loan approval:
Under 580 = Poor
580-669 = Fair
670-739 = Good
740-799 = Very good
800-850 = Exceptional
Credit borrowers who have established patterns of well-managed debts and a limited amount of borrowing in their past will typically have a good credit score, falling in the range of 670-739.
Not only do scores in this range help your case for mortgage approval, but a high credit score will also be an important advantage when your lender determines appropriate mortgage interest rates.
A higher score, in your lender’s eyes, means you’re much more likely to repay the loan and not find yourself overwhelmed with the cost of closing the mortgage or settling monthly payments. By establishing a good pattern of debt management, lenders won’t view lending you money as a risky decision. As a result, the cost of borrowing money will be reduced via a lower monthly mortgage rate.
When it comes to specific mortgage rates, reliable borrowers will find themselves with the lowest amount due in interest each month.