How Your Credit Score Can Affect Your Mortgage Rate and Monthly Payment

How Your Credit Score Can Affect Your Mortgage Rate and Monthly Payment

Your credit score and credit history directly influence your mortgage rate and your monthly payment deals. You might be wondering how it does. Lenders look at a lot of factors when determining how much of a risk you are when buying property and borrowing money.


Here is a breakdown of how credit score impacts your mortgage and monthly payment.


Lenders use the credit score to measure your viability for credit – credit score reflects your past credit usage. It speaks volumes of your responsibility in credit matters. A credit score will give lenders an idea of what to expect in the repayment period. A high credit score will mean lower interest rates and a lower monthly payment, while low scores will mean higher interest rates. The rule is, the better the credit score, the lower the annual percentage rate (APR), and the lower the monthly payment.


A credit score is calculated with the FICO scoring model, which uses information derived from your credit card report compiled by credit reporting companies. FICO stands for Fair Isaac Corporation, the largest and best known of several companies that provide software for calculating a person’s credit score.


What credit score do you need for a better mortgage rate?


A credit score of 700 plus will land a potential home buyer on friendly mortgage rates. However, creditors will set their standards on the acceptable score for a particular industry.

  • 740 or higher is considered an excellent score.
  • 700 – 739 is a good credit.
  • 630 -699 is fair credit.
  • 629 and below is poor credit.


A drop in a credit score will mean increased mortgage rates and may alter the terms. The effect of the increase may not seem to be higher, but if you took a fixed-rate loan over 30 years, the rate increase could accrue a lot of additional fees. Something as simple as %0.5 difference over 30 years can mean several thousand if not tens of thousands in extra interest over the life of the loan.


Related: How Financially Prepared Should You Be Before You Buy?


What affects the credit score?

  • Time of loan payments – accounts that show up on the credit reports, such as student loans or personal loans, should be paid in time to have a better credit score, which means a lower monthly payment rate.
  • Credit limits – for a better credit score, you have to keep your credit usage to less than 30% for all of your credit cards.
  • Credit history – the longer the history, the better your credit score will be. Making your credit card active for a long time means a better credit score, attracting a lower monthly payment.
  • Credit report errors – when there are errors in the credit card report, you might be denied the loan in the worst case. If you know of obvious errors that can’t be corrected, it’s best to write a letter of explanation to accompany your credit check.


Final thought

Credit score matters so much as far as the mortgage rate is concerned. Better credit reputation attracts low mortgage rates and lower monthly payments. If you’re not sure what your credit score is, you can request a free report each year from one of the three major reporting companies, Experian, TransUnion, and Equifax. While they are different, they basically pull from the same source even if the numbers are slightly off compared to each one.


For more information on homes for sale in Orlando, connecting with a qualified, full-time buyers agent that does nothing but help buyers, feel free to contact us below at any time.


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