There’s no question that better credit leads to a lower mortgage interest rate, but many people don’t realize just how much it can affect it – or just how easy it can be to boost their credit score. Learn the real impact of your credit score on your mortgage application.
Understand the real impact of a higher interest rate
You may wonder how much one percent can really matter in the life of a mortgage. If that’s true for you, then you may be shocked by the numbers. Consider a $200,000, 30-year fixed-rate mortgage. Compare the monthly principal and interest payments for two loans with interest rates just one point apart:
- 4% interest rate: $954.83 per month
- 5% interest rate: $1,073.64
That’s right, the difference is over $100 a month, every month, for 30 years! The impact can be significant not just over time, but on a month-to-month basis.
A low-interest rate can prevent you from getting a mortgage at all
A mortgage is a secured investment, which means that the lender automatically has collateral for every loan they make: the home you’re buying. It also means that mortgage loans are relatively low risk for banks. Though there can be significant costs involved in foreclosure, rarely do they have to worry about losing out on the entirety of their investment.
However, some potential-borrowers take this good news too far. They assume it means that lenders will extend a mortgage loan to anyone who applies. While mortgages can be easier to get approved than other loans, not everyone will get approved. As a general rule, borrowers with a FICO score of 620 or lower are very unlikely to get approved at all.
The difference a credit score can make: a simple breakdown
Generally, a credit score of 740+ will qualify a buyer for the lowest interest rates from the majority of lenders. For some lenders, the difference in interest rates between the lowest and highest credit scores can be as much as a percentage and a half. In short: good credit can save you tens of thousands on your home purchase.
Know what lenders are looking for
Lenders are keeping their eye out for several factors, including:
- Borrowers with low balances
- Long histories of on-time payments
- A mix of credit use
For example, the perfect borrower, from a bank’s perspective, is one who has a car loan, several revolving credit lines (like credit cards), have low balances on all or most of their accounts, and has paid on time for many years. They also consider how many recent inquiries a borrower has had, the total amount of debt, and the length of the applicant’s overall credit history.
If you’re ready to start improving your credit there is just one thing you need to do: contact Leaf Credit Solutions. Our experts can work closely with you to find the best route to a higher credit score – and lower mortgage payments!