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What Credit Score is Needed to Be Approved for a Mortgage?

By on February 27, 2014 in Mortgage

What Credit Score is Needed to Be Approved for a Mortgage?Everyone knows you need good credit in order to qualify for a home mortgage. But how high does your credit score need to be in order to qualify? What is the lowest your credit score can be to still qualify for a mortgage loan?

The Impact of Your Credit Score on Mortgage Application

Having poor credit is the result of poor and costly financial decisions in your past. Maybe you had some late payments or had a debt charged off to collections that you forgot about. The lending world is based upon your past credit history, so having black marks on your credit report will impact your ability to get a loan in the future.

One big aspect of your credit worthiness is your credit score. The better the score, the more likely you are to be approved for a mortgage loan at a competitive rate.

However, your credit score alone isn’t the only indicator that can sway an underwriter’s decision to let you borrow money through a mortgage loan. Even if you have a low credit score from mistakes from your past, an underwriter may want to understand what has changed about your financial situation. Just because you have a low score you are not absolutely eliminated from being approved for a mortgage. (You just may not be approved for the type of mortgage you want.)

Likewise, just because you have a great score you are not guaranteed to be approved for a mortgage. Having a great credit score but having hundreds of thousands of dollars in other debts like student loans can make the lender walk away from lending you money.

The Impact of Your Credit Score on Your Mortgage Rate

As you might expect the better your credit score, the better your interest rate for your home mortgage will be.

As of this writing, the upper echelon of credit scores (760 to 850) will enjoy a 30 year fixed rate mortgage at 3.083%. As you drop down further into the lower scores the interest rate slowly rises. A 700-759 score will get you 3.305%, 680-699 lands a 3.482% rate, all the way down 4.672% for 620-639. The higher interest rate is to compensate for your increased risk as a borrower. The lower you score, the more likely you are to default on the loan, and the bank makes up that risk by charging you more in interest.

Having a swing in interest rates like the ones listed above has a dramatic impact on how much interest you pay on a loan. For a mortgage of $160,000 (assuming to a $40,000 down payment on a $200,000 home), the difference between payments on a 3.083% interest rate and 4.672% is staggering. The lower interest rate has a payment of $682 per month over 30 years while the higher rate jumps that payment up to $827. That doesn’t sound like a lot of money, but over the life of the loan the higher interest rate loan results in $52,337 in extra interest cost.

Final Thoughts

There isn’t a set credit score needed to apply for a mortgage loan. You can be approved with a lower credit score; just expect to pay a higher interest rate than those with excellent credit. The better your credit score the lower your mortgage interest rate will be.

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