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Here's What You Might Save on a Mortgage By Boosting Your Credit Score

[Updated: Dec 11, 2020] Jan 23, 2020 by Maurie Backman
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You'll often hear that to qualify for a mortgage, you need great credit. But actually, that's not entirely true. FHA loans allow borrowers with poor credit -- meaning, a score as low as 500 -- to buy a home, and for a conventional loan, you could qualify with a score as low as 620, which is only considered "fair" by FICO standards.

But while you might get away with landing a mortgage when your credit isn't great, you should know that the higher your score at the time of your application, the more likely you are to snag a favorable rate on your home loan. And that could translate into serious savings over time.

Strong credit can really help

FICO scores range from 300 to 850, and anything under 580 is considered poor. By contrast, a perfect score of 850 is hard to attain, so most lenders generally consider you to be a strong borrower if your score is in the mid-700s or above. But it really pays to bring up your score as much as possible when applying for a mortgage, because the higher that number is, the more favorable an interest rate you're apt to snag on your loan.

Let's imagine you're looking to take out a $200,000, 30-year fixed mortgage. Here's how your credit score could impact your mortgage costs:

FICO Score Range Interest Rate on Mortgage Monthly Payment
760-850 3.346% $881
700-759 3.568% $906
680-699 3.745% $926
660-679 3.959% $950
640-659 4.389% $1,000
620-639 4.935% $1,066

Data Source: as of 1/20/2020

As you can see, having strong credit -- a score of 760 or above -- leaves you with a monthly payment of $881 on that loan based on today's interest rates. A credit score of 620, by contrast, will leave you with a monthly payment of $1,066. All told, that's an extra $2,220 a year for the same loan.

Of course, there's a pretty wide divide between a credit score of 620 and 760. But look at what a score even just one bracket below 760 means for your budget -- you're looking at $906 a month in mortgage payments rather than $881. That's an extra $300 a year, which would come in handy for other purposes if you were to save it. And that's why it really pays to boost your credit score before applying for a mortgage. A little effort on your part could translate into serious long-term savings.

Raising your credit score

Though you may not manage to boost your credit score overnight, a few key moves on your part could bring that number up fairly quickly. First, pay all of your incoming bills on time. Your payment history is the single most important factor that goes into determining your credit score, so if you pay your bills responsibly, you'll be rewarded with a higher score.

At the same time, try paying off a chunk of your existing revolving debt (namely, that of the credit card variety). Another big factor in calculating your credit score is your credit utilization, or the amount of available credit you're using at once. A utilization ratio of 30% or lower indicates that you're managing your credit responsibly, which means that if you have a total line of credit of $10,000, you should not have more than $3,000 in outstanding balances. If you do, paying off some of that debt could bring your utilization ratio into more favorable territory so your credit score improves.

Finally, check your credit reports for errors. Fixing a mistake could actually improve your score pretty quickly. You're entitled to a free copy of your credit report from each of the three bureaus every year -- Experian, Equifax, and TransUnion.

Your credit score matters

Clearly, having good credit could play a big role in determining your mortgage's interest rate, and the amount your home costs you each month as a result. If your credit isn't great, it could pay to delay homeownership until you're able to bring up that number.

Remember, when you're hit with an unfavorable rate on an auto loan, you're stuck with it for a handful of years. When you snag an unfavorable mortgage rate, you could wind up paying it for 30 years. And while today's mortgage rates are very competitive on the whole compared to what rates have looked like historically, it's still helpful to qualify for the lowest rate possible.

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