When you apply for a mortgage loan, lenders use your credit score as one of the factors to assess your creditworthiness and determine the interest rate they will offer you.
A higher credit score indicates that you have a good credit history and are more likely to repay your debts on time. As a result, lenders view borrowers with higher credit scores as less risky, and they may offer them lower interest rates on their mortgage loans.
Clearly, if you have a lower credit score, lenders will consider you to be a higher risk borrower and will offer you a higher interest rate on your mortgage loan.
According to FICO as of March 2022, someone with at least a 760 credit score could have an APR of an average of 6.539%, compared to 8.128% for those with the usually minimum credit score of 620. A FICO score is a credit score developed by the Fair Isaac Corporation (FICO), a data analytics company, and is widely used in mortgages.
If your credit score is below a certain level, lenders could require you to purchase private mortgage insurance (PMI). PMI protects the lender in case you default on the loan with this extra cost added to your monthly mortgage payment.
Your credit score also plays a role in determining whether you are approved for a mortgage in the first place. Lenders have minimum credit score requirements, and if your score falls below the threshold, it may be more challenging to obtain a mortgage.
In addition to the interest rate, your credit score can also impact your ability to qualify for certain mortgage programmes. Most lenders will have minimum credit score requirements for specific loan programmes, and if your credit score falls below those thresholds, you may not be eligible for those options. For example, government-backed loans like FHA (Federal Housing Administration) or VA (Department of Veterans Affairs) loans often have more lenient credit score requirements compared to conventional loans, around 580 instead of 620.
