Mortgage Rates Today Based On Credit Score – Thinking about refinancing a mortgage or getting a new mortgage? You need a credit score of over 800 to get the best mortgage rate possible. The reason why is the mortgage industry is very tight right now. Mortgage rates are rising. Recession fears are rising.
Your credit score is by far the most important determinant of getting the best mortgage rate possible followed by your debt-to-income ratio. To get the best mortgage rate possible, you need the highest credit score possible.
Mortgage Rates Today Based On Credit Score
Let’s look at what the data shows. I will also share with you my latest mortgage refinancing journey in 2019 to discuss how tight the mortgage refinancing process has become in 2020 and beyond.
Here’s How Much Your Credit Score Affects Your Mortgage Rate
To understand what credit score you need to get the best mortgage rate possible, you first need to see what the average credit score is for the market.
According to the New York Fed’s latest quarterly report on home debt and credit, 9 out of 10 U.S. mortgages go to borrowers with a score of 650 or better. Three-quarters go to borrowers with scores of better than 700. Meanwhile, the average credit score for the 50th percentile is around 760.
In other words, the AVERAGE mortgage originator (50th percentile) has a credit score of 760. Therefore, you need to get a credit score higher than 760 to get the best mortgage rate possible.
In the past, people used to think that having an above 720 credit score would lead to getting the best mortgage interest rate possible. A 720 is now only considered “good” according to FICO.
Va Loan Rates Today
Today, to get the best mortgage rate possible, you need a credit score over 800.
If you end up qualifying for a mortgage with a less than 800 credit score, your lender will likely pay you 0.125% – 0.75% more than if you had an 800+ credit score.
For example, considering the 10-year bond yield is around 1.5% as of 4Q2019, you can get a 30-year fixed mortgage for around 3.25% if you have an 800+ credit score.
If your credit score is between 740 – 799, your 30-year fixed mortgage rate will likely be 3.375% – 3.5%.
How To Get The Best Mortgage Rate
If your credit score is between 670 – 739, your 30-year fixed mortgage rate will likely be 3.5% – 3.75%.
With a credit score below 670, it is now likely that you will not qualify for a loan. If you do, your mortgage rate will probably be 4% – 4.5%.
About 75% of all mortgages are given to borrowers with a credit score of 720+. Lenders are seriously focusing on only the highest quality borrowers unlike pre-2008 when banks would lend to anyone in a heartbeat.
Given the tightening of lending practices since the financial crisis, along with the rapid decline in mortgage interest rates, it is unlikely that the United States will go through a decline of the same magnitude as in the past.
What Are Interest Rates & How Does Interest Work?
You can get a government loan from Fannie Mae and Freddie Mac if you have at least a 620 credit score. But you will be absolutely fleeced by the mortgage rate compared to what people with 800+ credit scores can get.
Since 2012, the housing market has had a tremendous bull run. Some places like San Francisco, Seattle, Denver and Washington D.C. have seen prices increase by more than 80%. As a result, there should be no urgency to buy a home at near-record prices without the best mortgage terms. Instead, I would work to improve your credit score to 760+ before applying for a mortgage.
As you can see from the chart below, the average US. FICO score reached a record high of 704 in 2018. It is likely to be a bit higher in 2022. Given that your competition has a higher credit score, you in turn need to boost your credit score as well because banks have more to choose from. Banks can afford to be more selective now, and they should, to protect their business and the economy.
The main way to improve your credit score is to always pay your debt on time for as long as possible. Don’t try to game the FICO score system by trying to open multiple credit cards and so on. Keep things simple.
How Does Your Credit Score Affect Your Mortgage Rates?
1) Shop around for the latest mortgage rate. Check the latest mortgage rates online. You’ll get real quotes from pre-screened, qualified lenders in less than three minutes. The more free mortgage rates you can get, the better. That way, you feel confident knowing you’re getting the lowest rate for your situation. Further, you can make lenders compete for your business.
2) Diversify into real estate crowdfunding. A decline in interest rates should boost demand for real estate. Check out Fundrise, my favorite real estate crowdfunding platform today. Instead of taking advantage of taking a concentrated bet on one property, it’s a good idea to diversify your real estate holdings.
I particularly like real estate in the heart of America where appraisals are cheaper and net rental yields are higher. I personally invested $810,000 in real estate crowdfunding after selling one of my SF rental properties for 30X annual gross rent with a 2.5% cap rate. Now I can earn money passively and am earning ~12% IRR so far.
About the Author: Sam worked in investment banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and received his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely because of his investments which now generate about $250,000 a year in passive income. He spends time playing tennis, taking care of his family and writes online to help others achieve financial freedom as well. Monthly loan payments consist of interest and principal. The principal is the money you originally borrowed, and interest is the added cost you pay to borrow money. So, the lower your interest rate, the easier it is to pay back. Why? There is less interest added to your monthly mortgage payment, saving you tens of thousands of dollars in the long run.
How To Improve Your Credit Score To Obtain A Better Mortgage Rate
Before setting your hopes too high, know that interest rates are not random. This is where credit scores come into play. Lenders use your credit score to assess creditworthiness and the likelihood that you will repay the loan. It is one of the most important factors when calculating an interest rate.
FICO (Fair Isaac Corporation) scores are commonly used by lenders, but there are other credit scoring models. FICO scores typically range from 300 to 850. The higher your FICO score, the better. Higher scores indicate that you’ve handled debt well in the past, and you’re likely to continue to do so. Lower scores prove that you have made poor financial choices in the past, and you may have trouble repaying a loan. Banks set interest rates (the APR or annual percentage rate) based on the risk you pose. If you appear to be a high risk, expect a higher interest rate. (Or, if your credit score is really low, you may be turned down.) On the other hand, if you’re a low risk (represented by a high credit score), you’ll usually qualify for a lower interest rate.
What does this mean to you? First, FICO changes its scoring model regularly. Rather than getting caught up in what each score emphasizes, do what you can to improve and maintain your financial profile.
A borrower’s creditworthiness is typically based on their payment history, credit mix, credit utilization and age of accounts.
The Five Components Of Your Credit Score
Using myFICO.com’s loan savings calculator, borrowers with a credit score above 760 save as much as $244 in monthly payments on a 30-year fixed loan, $250,000 mortgage compared to borrowers with a score ranging from 620 to 639. That’s about right. $87,522 in interest payments over the life of the loan.
Honestly, what determines a good credit score for a mortgage varies. It really depends on your loan program and financial history. Lenders look at things like your debt-to-income ratio, W2s, current debts, etc. to calculate your interest rate.
Check out some “typical” FICO score minimums by loan type. Just know that the chart we provide is a reference point. Contact an American Financial mortgage consultant to compare loan programs for your specific situation.
Maybe you’re worried that a not-so-great credit score will keep you from buying a house. Fortunately, the FHA loan program offers flexible credit requirements and down payments as low as 3.5%. A VA home loan is also worth exploring if you or your spouse qualifies.
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An experienced lender will work with you to determine the right mortgage for your situation. Gone are the days when borrowers had to come up with a 20% down payment to finance a property. There are many payment assistance options available today, some of which help borrowers with less than exceptional credit.
Again, your lender will assess your entire financial picture before discussing next steps. We recommend that first-time home buyers check their credit a year in advance so they have enough time to improve it if necessary.
There are no secret methods
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