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How Does Your Credit Score Affect the Home Buying Process?

February 15, 2022

 

Credit scores and mortgage rates tend to have an inverse relationship.  This means those with a higher credit rating are often able to secure mortgages at lower interest rates.  With a mortgage rate based on credit score, a “good” credit rating can save you tens of thousands over the lifetime of your loan. The reverse is also true. 

Ahead, we’ll unpack the relationship between your credit score and mortgage rates, so you have a better idea of what lending terms you can expect. 

Does Your Interest Rate Vary by Credit Score? 

Yes. During the loan qualification process, a lender will check your credit rating. If you meet their criteria, they will determine your loan’s interest rate by credit score. In this scenario, your credit rating gives the mortgage lender an idea of how risky or safe it is to loan you money.  Here’s how most creditors view credit score ranges: 

  • 800 or higher: Exceptional
  • 740-799: Very good
  • 670-739: Good
  • 580-669: Fair
  • 579 or lower: Poor

If you have a very high score, mid-700s or above, you can likely command the best rates available. The lower your score, the more you can expect to pay in interest over the life of the loan. 

For example, say you improve your score by just 60 points from 700 to 760. If it helps you qualify for the best possible rate and saves you even half a percent, you’ve just put a substantial sum back in your pocket. While that may not make a huge dent in your monthly payment, you could be saving roughly $700 a year. Multiply that by 30 years – the average mortgage term – and it’s a total of $21,960 saved on a $300,000 mortgage!

Curious what different interest rates would mean for your monthly payment? Try one of these free mortgage calculators

Is a Good Credit Score for Buying a House the Same for Everyone? 

Different loan types have different minimum credit scores needed in order to qualify. For instance, if you want a conventional loan (which generally has the most favorable terms) you’ll need a credit score of at least 620. 

For government-backed loans through programs like FHA or VA, you’ll need scores of 580 or more. Be prepared to put a certain percentage down depending on your credit, too. In the case of FHA, 3.5% is usually the rule, though it can be higher or lower depending on the loan program and lender you choose. 

Remember that 760 and above is usually reserved for a lender’s most favorable terms (i.e., lowest interest rate).

How to Build Credit to Buy a House

So, you’re ready to buy a new home. Great! You can start by checking your score for free with each of the three credit bureaus using AnnualCreditReport.com. It’s recommended you do so at least once a year. 

Don’t love what you see? Fortunately, there are plenty of tactics you can use to boost your credit score.  This should help you get a better mortgage interest rate. Then you can focus on saving some of your hard-earned money on that upcoming house payment. 

  • Set your bills to autopay. Your payment history counts for 35% of your score, so late payments can really drag you down. 
  • Reduce your credit card balances. The relationship between your combined credit card balances and the combined credit limit on all these accounts is called your “credit utilization rate.”  Low credit utilization usually means a higher credit score. Paying down balances so they are under 30% of your credit limit can hike your scores quickly from one month to the next. 
  • Keep older accounts open. The longer you’ve had an account, the more weighted it is on your credit report. Even if you don’t use the card, don’t close it unless you want to see your scores fluctuate.  
  • Don’t take out new lines of credit. This is important both when you’re building your credit, and once you actually start the home lending process. Wait until after you close on your home to take out a new loan or open another credit card.  
  • Correct errors on your credit report. Don’t pay for someone else’s mistake! 

How Does Buying a House Affect Your Credit?

Homeowners see an average 15-point decrease in their credit scores about a month or two after buying their homes. Continue to make your mortgage payments on-time and you should see it rebound within five or six months. 

Credit Score FAQ

  • What is the lowest credit score to buy a house?  Typically, you need a credit rating of at least 580 to qualify for an FHA home loan.  The lowest credit score for buying a house with a conventional mortgage is about 620.
  • How much credit history is needed to buy a house?  As a general rule of thumb, six years is thought to be the length of time needed to build credit to buy a house. 
  • Does your credit drop when you buy a house?  Many people ask “How does buying a house affect your credit score?” For a few months after you close, you may see your credit scores temporarily dip 15-40 points.
  • Does owning property increase credit?  Yes! As long as you are making payments on-time, owning property can improve your credit scores by diversifying your credit mix. 

Interest rates are expected to increase for everyone in the coming months. If you’re considering buying in a new home community, the time to act is now! Still have questions about the homebuying or lending process? Give us a buzz