How Your Credit Score Affects Your Interest Rate

by Lesli Fritts 11/24/2019

Image by Tierra Mallorca from Unsplash

One of the most important things to check once you decide to start the home-buying process is your credit score. The three major credit bureaus keep track of how you pay for your credit and how much credit you have. Your score fluctuates, sometimes daily, depending on how much you owe and how many accounts you have. Applying for credit also affects your score. It will usually drop by 2 points every time you apply for a loan or credit card, even if you don’t get the credit.

Applying for a Mortgage

When you apply for a mortgage, the lender pulls your credit score from all three credit bureaus. The lender will advise you whether it has a loan program that will accept your credit score. Some loan programs work with those who have scores as low as 520. Because the credit bureaus deduct points every time you apply, it’s better to call lenders and ask them if they have programs for lower credit scores—if your score is low.

Credit Scores and Interest Rates

Because lenders interpret your credit scores as the inability to manage your credit, they deem the risk of loaning you money quite high. The higher the risk, the higher your interest rate will be. If you have a credit score of 750, you might get a lower interest rate, depending on the current going rate. However, for the same loan, if you have a credit score of 540, you will pay quite a bit more interest. While rates depend on the bank, an example would be that you could pay 9 percent instead of 4 percent if the going rates are at 4 percent.

Changing Your Credit Situation

Before you even start looking for a house, pull your credit from all three major credit bureaus. Look for incorrect data. Dispute the data to correct it. For example, if you see a 90-day late on a credit card that you did not apply for or use, dispute that card to take it off your credit report. It is always a good idea if you pull your credit at least every three months to check for identity theft and incorrect data.

If your credit score is low because you ran into hard times and everything is correct, you could buy down your interest rate and put a larger down payment down on the loan. While you are saving up for the down payment, make sure you pay your bills on time to better your credit score. Try to save up 25 or 30 percent instead of the 20 percent most lenders require. Saving up a few thousand extra dollars also allows you to buy points, which drops your interest rate. A higher down payment also decreases the lender’s risk and might get you a lower interest rate.

The cost of points is usually 1 percent of the total loan. Thus, 1 point on a $100,000 mortgage would cost you $1,000. It could buy you a quarter of a percent interest rate. Instead of an 8 percent interest rate, you would have a 7.75 percent interest rate.

Researching loan programs and making sure your credit is accurate helps you determine whether you want to start the house-hunting process now or save for a higher down payment and wait for your credit score to increase.

About the Author
Author

Lesli Fritts

Hi, I'm Lesli Fritts and I'd love to assist you. I have been a full time Realtor in the Douglas/Elbert County area for over 25 years and have completed over 2500 successful real estate transactions. No transaction is either too large, or too small for me to handle. I have sold everything from mansions to one bedrooms condos. I specialize in rural estate properties and vacant land as well. When it comes to listing your home, I am an experienced staging professional and can assist in making your home show it's best. Each and everyone of my clients receive the same level of professionalism and time, regardless of the size of the transaction. I work equally with buyers and sellers. I really enjoy selling real estate but the best part of it is getting to know my clients, their families, and becoming friends! Many of my past clients continue to contact me for their continued real estate needs. Because my clients and friends refer me, you do not need to worry about me "hounding you" once we have made contact. My job is to assist you with buying or selling real estate for the best price obtainable, from start to finish and making the transaction as smooth and seamless as possible. And I love to have some fun while we are throughout the transaction! Experience does count. Whether you're in the research phase at the beginning of your real estate search or you know exactly what you're looking for, you'll benefit from having a real estate professional by your side. I'd be honored to put my extensive real estate experience to work for you!