Lenders determine the mortgage rate based on a potential homeowner’s credit score, amount of down payment and how much debt he has compared to his current income.
What Your Credit Score Means
Credit scores play a large factor in the interest rate a borrower will receive because lenders are determining the likelihood of someone defaulting on a loan or missing payments, said Jason van den Brand, CEO of Lenda, a San Francisco-based online home mortgage service.
“It's important to remember that the costs of a loan are closely associated to how ‘risky’ it is to give the loan,” he said. “If you look like a riskier borrower, your loan will cost more.”
Low mortgage rates can play a substantial factor in a homeowner's ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000.
Boosting Your Credit Score
A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here’s a quick rundown of what the numbers mean – a score of anything below 620 ranks as poor, 620-699 is fair, 700-749 is good and anything over 750 is excellent.
“Anything above 700 is considered to be good, but the average credit score for Americans is approximately 689,” said van den Brand. “A score of 620 to 640 will usually be good enough to qualify for any type of mortgage, but the interest rates you qualify for will probably be higher than someone who has a score of 740 or more.”