Credit score plays a role in your mortgage rate. Here’s what to expect.

Anybody considering homeownership may know that rising loan rates and housing prices make that objective more difficult to achieve.

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According to Trade Algo, the average rate on a 30-year fixed-rate mortgage has fluctuated between 6% and 7% for several months, down from around 7% in early November but almost double the 3.3% average going into 2022.

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But, the interest rate that every single buyer can qualify for is at least partially determined by their credit score - which means you have some power over whether you can acquire the best deal available rate, experts say. And a strong or exceptional credit score may make a big difference in monthly payments — as well as total interest paid throughout the life of the loan. "The score affects nearly everything: loan approval, interest rate, monthly mortgage insurance premiums... and eventually their payment," said Al Bingham, a credit specialist and Momentum Loans mortgage loan officer.

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According to Trade Algo, the median property price in January was around $383,000. Despite the fact that prices have been falling since mid-2022, that figure is still 1.5% higher than a year ago. The median in January 2020 was less than $300,000.

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While you may be able to negotiate the property's price to reduce the overall cost of homeownership, it's equally important to enter the process with the best credit available.

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Lenders evaluate three scores but only utilize one.

Although lenders consider factors such as consistent income, length of work, secure housing, and other elements of your financial life, your credit score provides extra information.

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The three-digit score, which runs from 300 to 850, is used by lenders to determine how dangerous a borrower you are. For example, your credit score will improve if you've consistently made on-time debt payments and have a low credit usage (the amount you owe in relation to your available credit).

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The higher the number, the less dangerous you are to lenders – hence the better loan conditions you may receive.

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Lenders investigate a homebuyer's credit record and score at the three major credit-reporting companies: Equifax, Experian, and TransUnion. For mortgages, the score offered by such businesses is often a specific one established by FICO, as it is the score now relied on by Fannie Mae and Freddie Mac, the major secondary market purchasers of house mortgages. (This dependence on a single score will likely alter in the future years.)

Nevertheless, because that specific FICO score might change amongst the three credit-reporting organizations owing to variances in what is been reported to them and the time, mortgage lenders rely on the middle figure to make their choice.

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The lower your interest rate, the higher your credit score. For example, according to FICO, the average rate on a $300,000 fixed-rate 30-year mortgage is 6.41% (as of Thursday) if your credit score falls is in the range of 760-to-850.

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Your monthly principle and interest payment would be $1,878. Property taxes, homeowners insurance, and private mortgage insurance are often added on top of this amount if your down payment is less than the 20% of the purchase price of the house.

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In comparison, if your score were to fall between 620 and 639, the average rate offered is 7.99%. It equates to a $2,201 payment (again, it's for principal and interest only).

Most of your monthly payment goes to interest at first

As the way loans are structured, the majority of your monthly payment is allocated to interest rather than debt in the outset.

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According to Bankrate's mortgage calculator, if you started paying that $300,000 mortgage next month at 6.41%, you would have spent $39,600 in interest and only $7,438 toward the principle in two years.

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According to the Bankrate calculator, a rate of 7.99% would indicate that you would have paid $49,570 in interest and $5,455 toward the principle in two years.

There are ways to boosted your Credit Score

When applying for a mortgage, there are a few things you should do to boost your credit score.

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"Improving your credit score boils down to the fundamentals," Ted Rossman, senior industry analyst at Bankrate, explained. "You should attempt to pay your payments on time, keep your debts low, and demonstrate that you can effectively handle various credit kinds over time."

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And, he claims, there are several things you can do right away to boost your score.

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"My preference is to minimize your credit usage ratio," Rossman added, referring to credit card balances. "Since this refreshes every month and often reflects account balances, you may have a high usage even if you pay off your credit cards in full each month to avoid interest."

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He suggests making an extra mid-month payment or requesting a greater credit limit to reduce the ratio.

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"It's frequently advised to maintain [the ratio] below 30%, but below 10% is even better, and your credit score should rise as long as you bring it down," Rossman added.

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He also advises monitoring your credit report before applying for a mortgage, which you can do for free at annualcreditreport.com. "Search for and repair any problems as soon as possible," he said.

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