Your credit score can have a significant impact on your mortgage. It can affect whether you qualify for certain loan programs and, in many cases, the interest rate or pricing available to you.
But mortgage pricing is more complicated than simply saying that one particular credit score receives the best rate. Your credit score is one important factor, but it works together with the loan program, down payment, property type, occupancy and other characteristics of the mortgage.
Understanding how lenders evaluate credit can help you prepare before applying for a home loan—and potentially avoid expensive mistakes.
How Does Your Credit Score Affect Your Mortgage Rate?
Generally, stronger credit can provide access to more favorable mortgage terms. With some mortgage programs, differences in credit score can affect the interest rate, discount points or other pricing adjustments associated with the loan.
However, there is not one universal mortgage rate assigned to every borrower with a particular credit score.
Two borrowers with the same credit score could receive different mortgage pricing because their loans have different down payments, loan amounts, property types, occupancy, loan programs or other characteristics.
That is why it is better to evaluate the complete mortgage scenario rather than focus on credit score alone.
Is There a Credit Score That Gets the Best Mortgage Rate?
There is no single credit score that guarantees the lowest mortgage rate in every situation.
Generally, a higher qualifying credit score can improve mortgage pricing, particularly with conventional financing. But the point at which additional credit-score improvement affects pricing can vary based on the loan and the applicable guidelines and pricing adjustments.
Instead of assuming you need to reach an arbitrary number, have your actual mortgage credit reviewed. We can determine whether improving your score could materially change the financing available to you.
Can You Get a Mortgage With a Lower Credit Score?
Yes, depending on the circumstances.
Different mortgage programs have different credit requirements, and lenders may also have their own requirements. A credit score that results in less favorable pricing for one loan program does not necessarily mean that you cannot qualify for a mortgage.
Conventional, FHA and VA financing can treat credit differently, so part of the mortgage planning process is determining which available program makes the most sense for the borrower’s overall financial profile.
Credit score is also not the only consideration. Income, debts, assets, down payment, credit history and other factors can affect mortgage qualification.
The Credit Score You See Online May Not Be Your Mortgage Credit Score
This causes a great deal of confusion for homebuyers.
There are multiple credit scoring models. The score displayed by a credit card company, bank, credit-monitoring service or consumer website may use a different scoring model from the one being used for your mortgage application.
As a result, the score you see online can be different—sometimes significantly different—from the credit score obtained during the mortgage process.
That does not necessarily mean either score is incorrect. They may simply be calculated using different scoring models or credit-report information.
How Do Mortgage Lenders Determine the Qualifying Credit Score?
Mortgage lenders typically obtain credit information from Equifax, Experian and TransUnion. Because the information reported to each credit bureau can differ, the resulting credit scores may also differ.
How the representative or qualifying credit score is determined depends on the mortgage program and the borrowers involved in the transaction.
For an individual borrower, mortgage underwriting has traditionally used the middle score when three usable scores are available. When more than one borrower is applying, additional rules determine which representative score is used for qualification and, where applicable, mortgage pricing.
Because mortgage credit requirements and scoring methodologies can vary by program, we evaluate the actual credit report and loan scenario rather than relying on a consumer credit score alone.
Your Credit Report Matters Too
The numerical score is important, but it does not tell the entire story.
A mortgage credit report can also show payment history, outstanding balances, monthly obligations, collections, public-record information when applicable, recent inquiries and other information that may affect the loan.
Reviewing credit early gives us time to identify potential issues before you are under contract on a home.
Can Improving Your Credit Score Lower Your Mortgage Cost?
Sometimes it can.
If your credit score is close to a pricing threshold or affects your eligibility for a particular mortgage program, an improvement may result in better financing options.
But borrowers should not make random changes to their credit simply because they are trying to increase a score.
Paying off an account, closing a credit card, opening new credit, disputing an account or changing revolving balances can sometimes affect a credit profile in unexpected ways.
If you are preparing to buy a home, it can be helpful to review your mortgage credit first and determine whether there is a specific reason to make a change.
Don’t Focus Only on the Interest Rate
When comparing mortgage options, look at more than the advertised interest rate.
Mortgage pricing can involve both the interest rate and the cost associated with obtaining that rate. One lender may quote a lower rate that requires more discount points or upfront cost, while another option may have a slightly higher rate with lower costs.
The better comparison considers the rate, lender costs or credits, loan program, mortgage insurance when applicable, monthly payment and how long you expect to keep the mortgage.
Check Your Credit Before You Start Shopping for a Home
You do not need perfect credit to begin a conversation about buying a home.
In fact, reviewing your credit earlier can be more useful because it gives us time to identify any problems, discuss available loan programs and determine whether improving your credit could provide a meaningful financial benefit.
And remember: the credit score you see through a consumer service may not be the same score used for mortgage qualification or pricing.
If you are considering buying a home, we can review your mortgage credit as part of the pre-approval process and help you understand how it affects the financing options available to you.
Questions about your credit and mortgage options?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
Ready to explore your options? Start your prequalification online.
