How does a credit score affect a mortgage rate?

Whether you are considering refinancing your existing mortgage or you are buying a home, it is a good idea to find out what your credit score is because that can have quite an impact on the rates you will be offered.

 Low credit score: High rate

 When a loan is being underwritten, lenders focus in on the amount of risk they are assuming before they loan money. Investor Words defines underwriting as “The process by which a lender decides whether a potential creditor is creditworthy and should receive a loan.” 

The better your credit score, the less risk the lender is assuming. Lenders assume that if you pay all your bills on time before you accept a mortgage, the more likely you are to continue to pay your bills on time in the future. Therefore, a borrower who has a low credit score will pay a higher rate of interest because the lender sees them as a higher risk borrower.

Credit score ranges

Most consumers are not aware of how credit scores impact their interest rate for one simple reason: Most do not know how they are calculated. Credit scores are calculated based on several factors including your payment record, amount of credit you have available to you, and how much additional credit you have applied for. Credit scores range from a low of 300 to a high of 850. Each credit reporting agency has their own internal factors that determine how your credit is scored, so often you will have multiple scores.

High score: Low rates

Consumers who have a credit score that is in the “high” range, can expect an interest rate up to four percentage points lower than those who have “low” range scores. High range scores are typically between 760 and 850 while low range scores are generally 500-579. 

Buying a home with a poor credit score

Lenders also control how much money you put down when you buy a home. In many cases, when you purchase a home you can put as little as five percent down. However, oftentimes, a lender will penalize someone with weak credit scores by requesting a higher down-payment. Too often, this means you are being penalized twice, first by a higher down-payment then by a higher interest rate. 

Today, the mortgage rates are quite low. However, if you have a poor credit score, you may still be paying rates that appear to be more like rates that we saw during the 80′s. Borrowers with great credit may be able to secure mortgage financing under six percent while borrowers with poor credit could be paying more than nine percent.

Before you apply for a mortgage, request a copy of credit report. You are entitled to one copy of your credit report every year. While these reports do not include your credit scores, they will allow you to verify your current credit file and determine if there is erroneous information that may impact your mortgage rate. Take the time to verify the information on your credit report. Once you have completed this process, talk with your lender about your credit score and how it may impact your eligibility for a mortgage.

Byline:  Aaron Gormley recommends visiting www.AnyHouseWanted.co.uk if you ever find yourself needing to sell your home quickly.  

© 2013, Aaron. All rights reserved.

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