What Type of Mortgage Rate Can I Get With My Credit Score?

Person comparing mortgage rates on their laptop.

Are you thinking of applying for a mortgage in North Carolina and wondering whether you’re ready financially? This guide will help you understand how your information is weighed.

Mortgage Rates and Credit Score: How One Affects The Other

Mortgage rates and credit scores are inseparable. If you wish to get a mortgage for a home, your credit score will certainly be considered. In fact, it’s a critical factor in getting a loan approved.

Your credit score is an indication of your credit-worthiness; in other words, is it worthwhile for a lender to allow you to borrow money? Are you a good return on the lender’s investment? Your score provides lenders with a clearer picture of how likely is it for you to pay the debt you accrue.

A low credit score increases your mortgage rate—if you receive approval at all. Even a slight decline in your score could mean paying thousands of dollars more over the duration of your loan.

Credit History and LTV Ratio

In basic terms, your credit history is simply a description of how you use money and how you’ve managed your ability to gain access to credit opportunities in the past. This includes the number of credit cards and loans you have and how promptly you’ve paid your bills.

All of your credit information is collected and then funneled into your personal credit report. Banks, insurance companies, potential employers and other businesses make use of the report to assess your creditworthiness and your trustworthiness.

You are given a credit score on the basis of your credit history. A high score shows that you are a credit-worthy person, while a low rating means you have a poor credit history.

LTV ratio, on the other hand, is an assessment used by lenders to evaluate the risk involved in making a loan to you and, specifically, your risk of defaulting. A combination of your credit history and LTV ratio greatly helps a lender decide if it's worth the risk of giving you a mortgage. If you have a history of late loan payments and a high LTV ratio, you will find it extra difficult to get a mortgage.

Which Score Matters More?

There are different types of credit scores, based on slightly different factors. The most popular, however, is arguably the FICO Scores by the Fair Isaac Corporation. FICO scores, deemed the most accurate measurement as a result of the methodology used in calculating them, are used by more than 90 percent of major lenders when processing loans. They are an easy way to assess mortgage options for borrowers.

There are different types of FICO Scores and multiple versions. The latest version is FICO Score 9, although some lenders may use an earlier edition. Consider speaking with your preferred lender to inquire about the specific score they use.

Lenders typically use the lowest median score on a particular type of loan for qualifying an applicant for the same loan. In other words, your credit score must be at least that of the lowest median score.

Best Score for Conventional Loans

What constitutes a good score for obtaining a traditional loan differs between lenders, but in general, a credit score higher than 670 will make you eligible for a mortgage.

Experts advise borrowers to aim for a score higher than 700 to enable them to get attractive interest rates. You are considered to have "excellent" credit rating if your score is at least 720. The higher your score, the lower your mortgage rate becomes.

Conversely, the rates increase as credit scores drop. It is typical for a lender to hike your mortgage rate for every 20-point drop in your credit score.

When Your Score Does Not Matter...as Much

You can still get some mortgages even if you have a low credit score. These types usually are not backed by government-sponsored mortgage companies Fannie Mae and Freddie Mac.

They include VA loans, Federal Housing Administration (FHA) home loan and U.S. Agriculture Department-backed loans. For instance, you can get an FHA mortgage with a minimum credit score of 500. And while there is no minimum FICO score requirement for VA loan, most lenders want you to have a score of at least 620. These loans may cost you more, however. They often come with expensive fees, and you will be required to pay an upfront amount and a yearly mortgage insurance premium.

Becoming A First Time Homebuyer: Are You Ready?

Use our Mortgage Loan Calculator to determine your monthly payment and generate an estimated amortization schedule. It quickly allows you to see how much interest you could pay and your estimated principal balances.