Borrowing

This Is the Credit Score You Need to Get the Best Rate on a Mortgage

Myelle Lansat@myellelansat
Twenty/20

Monitoring your credit score is an important part of preparing to buy a home.

Your credit score is a number that lenders use to assess your creditworthiness, affecting whether you get a loan and what kind of interest rate you're offered. It's based on information in your credit report, which tracks how you handle credit—details like whether you make payments on time and how much debt you carry.

Scoring brand FICO, which most lenders use, ranges from 300 to 850. The higher your score, the better.

But you don't need a perfect score to save a lot of money, including on your mortgage: You'll get the best rates if your score is 760 and above.

Aim for a score of at least 760 at multiple bureaus

In most cases, when you apply for a loan or line of credit, the lender will obtain one score based on data from one of the three major credit reporting bureaus: Equifax, Experian, or TransUnion. When you apply for a mortgage, though, lenders often pull what's called a tri-merge credit report, which gives them three scores—one from each bureau, says credit expert John Ulzheimer, who has worked for FICO and Equifax.

Looking at scores from all three bureaus helps the lender better gauge how likely you are to keep up with loan payments. Most lenders tend to go with your middle score, meaning you'll need a score of 760 or better at two of the three to nab the best rate. That goes for you and anyone you're applying with, since lenders will base the loan application on the lowest middle score among the applicants if you apply jointly.

"Of course, if you have three great scores then it doesn't really matter. And, if you have three lousy scores, it also doesn't really matter," adds Ulzheimer. That's because if your scores are all "excellent" (750-850) or "poor" (600-649), then your middle score will fall squarely in that range.

The median credit score for new mortgage borrowers is 759, according to the Federal Reserve.

Why small credit score changes can have a big impact

Let's say you're applying for a mortgage with a score of 759, which Fed data shows is the median for first-time homebuyers. With that score, FICO's calculator estimates, you'd qualify for a 3.7% rate on a 30-year fixed loan. By FICO's calculations, if you borrowed $216,000, that would result in a monthly mortgage payment of $998. Over the life of the loan, you'd pay $141,916 in interest.

Now say you have a FICO score of 760, meaning you're eligible for the best rate: 3.51%. That means your monthly mortgage payment will be $972 ($26 less), and you'll pay $133,611 in interest over the life of the loan.

So a 1 point increase in your credit score can save you $8,305.

You can check out FICO's loan savings calculator to see how your credit score affects your loan interest rate.

How to improve your credit score

If you anticipate buying a home in the next year, Ulzheimer suggests doing your research and "pulling your credit reports and scores to get an idea where you stand before you start applying."

These steps can help you bump up your credit score before reaching out to lenders.

  • First and foremost, pay all your bills on time. Paying your credit card late is the No. 1 reason credit scores drop. Late payments on rent, utilities, and other bills can also drag down your score. One solution: Set up automated payments to avoid late payments and fees, and to save yourself time.
  • Next, keep your utilization rate, which is the ratio of how much you've spent on your credit card compared to how much you can spend (your credit limit), as low as possible, ideally below 30%. For example, if your credit limit is $5,000 and your balance is $500, that gives you a low utilization rate of only 10%. Your utilization score is a good indicator of how much of a risk you are to prospective lenders, and how likely it is that you'll pay back any money you borrow.

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