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. Credit & Loans

    What is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  2. Credit & Loans

    New Rules May Make It Easier to Get a Mortgage

    Fannie Mae and Freddie Mac have come to terms with lenders on how to solve mortgage disputes. This could be good news for people with lower credit ratings.
  3. Home & Auto

    Don't Be the Victim of Auto Loan Rip-Offs

    Subprime auto loans – and 60-day delinquencies – are up. These 4 signs of predatory auto loans can tip you off before you're caught in one.
  4. Retirement

    Best Mortgage Companies Friendly to Retirees

    If you’re no longer in the workforce and need a loan to buy a home, which companies are the most welcoming? Plus, good news about qualifying for a loan.
  5. Credit & Loans

    Don't Get Overcharged for Your Mortgage

    Don't pay more for a mortgage than necessary. Here’s a quick look at the different categories and how to be sure you're getting the best deal.
  6. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  7. Home & Auto

    7 Must-Have Real Estate Contract Conditions

    Buying a home can bury you in paperwork. But it’s worth your time to make sure your contract contains these seven important conditions.
  8. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  9. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  10. Home & Auto

    Understanding Pre-Qualification Vs. Pre-Approval

    Contrary to popular belief, being pre-qualified for a mortgage doesn’t mean you’re pre-approved for a home loan.
RELATED FAQS
  1. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  2. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  3. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  4. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center