Home ownership remains a long-standing dream for many people, and most prospective homebuyers require financing - normally, in the form of a mortgage - in order to achieve this goal. Did you know that your credit score is among the key factors used by mortgage lenders to determine your interest rate and payment terms? Here, we take a look at credit score and how it weighs in on your mortgage payment.
What's Your Credit Score?
Essentially, a credit score is a number used by lenders to determine how likely you are to pay back a loan. Credit scores generally range from 300-850, and they are calculated using information contained within your credit reports. Most lenders view higher credit scores more favorably than lower credit scores as they indicate greater likelihood of payback; therefore, it is in your best interest to boost your credit score as high as you can before you apply for a mortgage.

How Is Your Credit Score Calculated?
Components of your credit score include whether or not you pay your bills on time (i.e. payment history), the total amounts owed (usually, as a percentage of credit outstanding), the length of your credit history, how much of your credit is new and the types of credit used. Have a look at the chart below, which breaks down each factor's weight in the calculation of credit score. As you can see, your payment history accounts for 35% of your credit score, which makes it the most meaningful component of your credit score.

Payment history 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit 10%

How Does My Credit Score Determine My Mortgage Payment?
To put it simply, the higher your credit score, the lower your mortgage interest rate. Several online loan calculators illustrate this point; using the MyFico.com loan calculator, we see how borrowers with a credit score ranging from 760-850 merits around 3.55% mortgage interest rate on a 30-year fixed-rate mortgage, whereas borrowers on the lower end of the credit score spectrum see less desirable interest rates (e.g. a borrower with a credit score ranging from 620-639 might see his/her interest rate at about 5.139%). Of course, this example is presented for illustrative purposes only; the best way to determine your mortgage interest rate is to speak with a mortgage lending professional.

Credit Score Interest Rate Monthly Payment Total Interest Paid
760-850 3.55% $452 $62,663
700-759 3.772% $464 $67,171
680-699 3.949% $474 $70,813
660-679 4.163% $487 $75,270
640-659 4.593% $512 $84,401
620-639 5.139% $545 $96,326
Source: MyFico.com Loan Savings Calculator; rates based on national averages, assumes $100,000 loan principal, 30-year fixed-rate mortgage.

How Do I Improve My Credit Score?
To improve your credit score, it is important that you pay all of your bills on time. Recall that payment history is the largest determinant of your credit score; therefore, any missed or late payments are sure to harm your credit score.

SEE: 3 Easy Ways To Improve Your Credit Score

Amounts owed on existing credit lines also factors into your credit score (30% weighting). Your credit score will likely improve if you lower your credit card balances ("maxed out" credit cards tend to negatively affect your credit score). Paying off debt and not opening new credit card accounts may also help your score.

The Bottom Line
Home ownership is possible, and your credit score is an important factor when it comes to determining your mortgage interest rate. Aim for the highest credit score possible, and your mortgage terms are likely to be more favorable. Good luck.

Related Articles
  1. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  2. Credit & Loans

    HARP Loan Program: Help for Underwater Mortgages

    If you are underwater on your mortgage, this program may be just what you need to help build up equity in your home.
  3. Insurance

    6 Reasons To Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  4. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  5. Home & Auto

    9 Things You Need To Know About Homeowners' Associations

    Restrictive rules and high fees are just some of the things to watch out for before joining an HOA.
  6. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  7. Savings

    These 10 Habits Will Help You Reach Financial Freedom

    Learn 10 key habits for achieving financial freedom, including smart budgeting, staying abreast of new tax deductions and the importance of proper maintenance.
  8. Credit & Loans

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  9. Taxes

    Before You Visit Your Tax Preparer: Do This

    The earlier you start preparing your tax records and documents, the more likely you are to have a smooth tax return experience – and all the tax benefits you're due.
  10. Investing

    How to Raise Your Credit Score Quickly

    Here are the best tips for raising your credit score quickly.
  1. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  2. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  3. Is it possible to get a free credit report from Equifax?

    It is possible to get a free credit report from Equifax, as well as the other two major credit bureaus, Experian and TransUnion. ... Read Full Answer >>
  4. Do free credit reports affect your credit score?

    Free credit reports do not impact your credit score. Credit inquiries are divided into two categories: soft inquiries and ... Read Full Answer >>
  5. Does a free credit report show your credit score?

    The free credit reports available from the three credit reporting agencies do not include your credit score. Under the 2 ... Read Full Answer >>
  6. Is getting a free credit report safe?

    Getting a free credit report can be safe if you are careful about the particular website from which you get it. Credit reports ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center