How Do Credit Scores Affect Mortgage Interest Rates?
Everyone knows that your credit score affects your ability to get a mortgage. What's less well-known is just how it affects the interest rate you'll pay.
The general rule of thumb has traditionally been that you need a FICO credit score of 720 to obtain the best mortgage rates. Unfortunately, that's no longer true. These days, most lenders will demand a score of 740 or even 760 before a borrower can qualify for their best mortgage rates.
Sliding scale for credit scores, rates
According to the Fair Isaac Co., which developed the FICO credit scoring system, the best interest rates are currently available to borrowers with scores of 760 and above, to a "perfect" score of 850 on the FICO system. Just below that, borrowers in the 700-759 range can expect to pay about 0.2 percentage points more (20 basis points) on a 30-year fixed-rate loan, all other things being equal.
From there on down, interest rates jump for every 20-point decrease in credit score. The interest rate goes up by roughly another 0.2 percent for each additional drop to the 680-699 range and 660-679. Drop below 660 and the increase is more than twice as big, a 0.43 percentage point increase for borrowers in the 640-659 range. Below that, you can tack on roughly another half percent for borrowers with scores from 620-639, although many lenders will decline clients with scores this low.
There are some lenders who will still make loans for borrowers with credit scores below 620 but they're relatively few and you're going to need a sizeable down payment or equity in your home (if refinancing).
Difference between best credit, poor credit
All told, you're looking at a difference of about 1.6 percent between the top of the credit range and the 620 range on a 30-year fixed-rate mortgage. That works out to a difference of about $100 per month per $100,000 of mortgage amount between the best credit (currently about 4 percent) and worst (5.6 percent), according to Fair Isaac. For example, a borrower with a $300,000 mortgage would pay about $1,400 a month at 4 percent interest, versus $1,700 at 5.6 percent.
It should be stressed that there are a variety of factors that affect your interest rate besides your credit score. Among these are the size of your down payment, the type of loan you're getting, where you live, any discount points paid, etc. Rates also will vary from lender to lender for the same customer, so it pays to shop around - and compare all costs of the mortgage, and not just interest rates.
Make sure it's a FICO score
One final thing - the variances in rates described above are based on FICO credit scores - the ones lenders typically ask for when evaluating a borrower for a mortgage. However, if you order your credit score from one of the three credit rating agencies, there's a good chance it will be based on a proprietary rating system and not a FICO score.
These proprietary systems can produce scores that vary significantly from a FICO score and may give a consumer the impression their credit is better than it is. You can obtain your Equifax or Transunion FICO score for free through MyFico.com or for a fee from either company; just make sure the score you're obtaining is specifically identified as your FICO score. You cannot obtain your FICO score from Experian, as it no longer provides customers with FICO scores but will only provide them with scores produced by alternative credit scoring systems.
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