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Home Finance

What Is a Credit Score and How Can it Save You Money on Your Mortgage?

by Mahesh
May 30, 2022
in Finance
What Is a Credit Score and How Can it Save You Money on Your Mortgage?

When applying for a mortgage, one of the most important factors is your credit score. As a first-time homebuyer, you should know how your credit score will affect your mortgage rate.

 

In this article, we’ll explain all the tricky terminology surrounding credit scores and how a better credit score can ultimately save you money on your mortgage.

What Is a Credit Score?

According to the Consumer Financial Protection Bureau (CFPB), a credit score predicts the likelihood of you paying back a loan. Credit bureaus use scoring models that assess your credit history and use it to calculate your score as a three-digit number in your credit report.

There are many different types of credit scores and scoring models. Generally, the higher your score is, the more likely it is that you’ll get more favorable credit terms.

How Is My Credit Score Determined?

To calculate your credit score, lenders use factors like payment history, outstanding debts, and credit history. The main factors that determine a credit score are:

  • History of your bill payments
  • Current unpaid debts
  • Number of loan accounts you hold
  • Whether any of your debts have been sent to collection, foreclosure, or a bankruptcy case

When you receive a credit report, your credit score will appear as a number ranging from 300 to 850.

Credit Score Examples 

Most credit bureaus will return the following ratings:

  • Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very Good: 740-799
  • Excellent: 800-850

How Your Credit Score Affects You

With a higher credit score, you can access low-interest rates and get premium rewards. Besides buying a house, a good credit score can help you:

  • Land a new job
  • Rent a property
  • Refinance existing loans for better terms
  • Buy a car

The main thing to remember is that the lower your score, the riskier you will appear to lenders, which means they’ll be less likely to lend to you and more likely to offer less favorable terms if they do accept your loan application.

How Your Credit Score Affects Lenders

Banks and credit unions want to lend to people who can make each monthly payment on time. That’s why lenders use credit reports to understand whether borrowers can afford to repay the loan and how likely they are to make repayments on time.

In other words, your credit score is an assessment of your creditworthiness and an indication of whether you’re a responsible borrower.

Coupled with your debt-to-income (DTI) ratio and financial history, credit scores are a significant factor in determining your mortgage interest rate.

What Is a Good Credit Score for Buying a House?

Credit score ratings may differ depending on the type of loan you require.

Conventional Loan Requirements 

To obtain a conventional mortgage, you’ll need a score above 620. If your score is lower, lenders will likely offer you a higher interest rate.

FHA Loan Requirements 

The government insures Federal Housing Administration (FHA) lenders against the possibility of the borrower defaulting on the loan. This means that obtaining one doesn’t require a score as high as 620. FHA loans require a minimum score of 580, and may be available to applicants with lower scores if they can provide a higher down payment.

VA Loan Requirements 

This government-backed loan is available for veterans, qualified service members, and their spouses. With this loan, there are no minimum requirements, but some lenders expect a score of at least 580.

USDA Loan Requirements 

The United States Department of Agriculture (USDA) provides home loans to families in rural areas. If you’re looking at this type of mortgage, you should have a credit score that’s above 620.

What Can A Higher Credit Score Do For You?

The higher your credit score is, the more money you could potentially save. A credit score over 700 will allow you to get more competitive interest rates.

For example, if you applied for a mortgage with a credit rating of 760, you could end up paying

$87 less each month, which is over $3,000 for three years..

Good Credit Puts Money In Your Pocket

Ultimately, a good credit score has a positive effect on your ability to secure a mortgage. Even the smallest of differences in your credit rating can drastically alter your monthly payments.

FAQ

How Does Your Credit Score Impact Your Mortgage Payment? 

Your credit score will affect your mortgage by increasing or decreasing the interest rates of mortgages available to you. For example, a 20 point difference could take you from a Poor rating to a Fair rating and allow you to save thousands of dollars.

What Is a Good Credit Score for a Mortgage?

 

A good credit rating will depend on the type of loan you want to secure. Conventional mortgages require a score above 620. FHA loans require a minimum score of 580. VA loans have no minimum requirement, and USDA loans expect borrowers to have a score above 620. Generally speaking, though, the higher your credit score the better.

What Is a Credit Score and Why Would a Lender Use a Credit Score?

A credit score predicts the likelihood of you paying back a loan over a certain period. Lenders want to grant people money who are able to make repayments on time and who are unlikely to default on a loan. As such, lenders use credit reports and credit scores to assess whether you’re a trustworthy borrower.

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Mahesh

Mahesh

I'm an Engineer by profession and Writer by passion. I am working as a Content Marketer at TechMsd.com. I have been writing for more than 5 years, mostly on technology. I have experience includes writing, public speaking, and ghostwriting articles, blogs, and business communications across several industries. I like to watch foreign-language movies and public speaking.

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