Credit scores have a very significant impact on a borrower’s chances of getting an affordable interest rate on a home mortgage loan. In the extreme, they can even affect whether a potential home buyer will even be approved for a loan at all. A borrower’s credit rating is the single most influential factor weighing in on the interest rate scale of affordability. The interest applied throughout the term of a mortgage can potentially translate into hundreds of thousands of dollars, and on such a large expenditure as a 30 year loan, it is a serious amount of money; even the smallest change in your interest rate will affect how much you pay significantly. The bottom line: the lower the score, the higher the interest rate. Keep reading to learn more about the credit industry and what lenders are looking for.
Current State of Credit Industry
While credit standards have not historically been so restrictive, the entire credit industry as a whole has been transformed in recent years. Borrowers with minimum score thresholds in the mid 600s will have great difficulty in acquiring a low rate, regardless of income or asset levels. Only those with top-shelf credit ratings beyond 740 will be approved for the most favorable mortgage rates, terms and conditions. Generally, depending on the lending source, the mortgage interest rate ‘spread’ between the highest and lowest credit scores can be as much as 1.5 percentage points. As an illustration, this variable on a monthly mortgage payment for a $300,000 loan would be nearly $300. Factored over a 30 year term, the difference between the interest rates applied would exceed $100,000.
What Lenders Want
Lenders will assign a borrower an interest rate that is equated to the level of risk they are taking in funding the loan. Naturally, they want to see borrowers with low account balances, a lengthy and on-time history of payments, and a broad assortment of credit types, such as auto loans and credit card accounts. In addition, lenders evaluate what debts are outstanding, the entire span of credit history, and, how much new credit has been applied for in terms of inquiries. In the investment world, the higher the risk, the higher the yield, and the principle holds true in the mortgage lending industry as well.