How Does Your Credit Score Effect Your Mortgage Rate?

• Author: Chris Remington
• Posted: 2024-10-27

How does your credit score affect your mortgage rate? Lenders use your credit score to make decisions regarding the terms and interest rate you can expect to receive on your mortgage. Your credit score is a reflection of your ability to repay a loan, and a higher score means better mortgage rates and savings over the lifetime of the loan. Lenders adjust their rates to protect themselves from losses in case you default or fail to make your payments. If your credit score is low, you may be asked to pay mortgage insurance. This may cost you around $36,720 over the life of the loan.

One of the easiest ways to raise your credit score is by paying down all of your debt. A good debt-to-income ratio of less than 30% means you are more likely to afford your mortgage payments. This ratio is also taken into consideration by lenders when determining your mortgage rate. If you are unable to afford your monthly payments based on your credit score, you can seek a goodwill adjustment. This adjustment will help your mortgage payments by removing the record of late payments.

Having a good credit score will open doors. You can request a higher credit limit, apply for a larger personal loan, and obtain lower mortgage and home equity loan rates. Getting a high credit score can save you tens of thousands of dollars over the life of your mortgage. As interest rates are partly determined by risk, the higher your credit score, the lower your interest rate will be. So, while your credit score may not seem important at the time of applying, improving it can help you save thousands of dollars over the years of your mortgage.