Do High Credit Scores Always Mean Low Mortgage Rates Today?

When you apply for a mortgage, your credit score with the three credit bureaus has an effect on the rates you get. In most cases, the higher your score, the lower the interest rates you are offered by lenders. Credit scores are influential in the mortgage loan process today and have been since the US government essentially forced the mortgage industry to use them about 20 years ago.

These days, most credit scores utilize the Fair Isaac Corporation (FICO) model. It grades consumers on a scale of 300 to 850. A higher score means there is a lower risk to the lender. Generally, a 750 FICO score is considered excellent and will net you the best rates. Many of the low interest rates you see advertised are for people with credit scores in this range. If your score is lower, you may have a higher rate.

It is up to your mortgage lender to determine what type of score a borrower needs to get the lowest rates. Different lenders have different criteria; each has different groups of investors who may have different risk tolerances, so it is possible to get a better rate with a lower credit score than you might think. But it also is possible for a difference of a few points in your credit score to affect your monthly payment substantially.

To understand how a credit score can affect your payment, consider this example. A 30-year, $200,000 loan at 4% without fees would have monthly payments of $954. But if you have a 5% interest rate, that will increase the payment on the loan to $1073. Raise it to 8% and you are looking at a payment of $1,467.

If you have a credit score that is 700 or higher, this is a good score, and you can probably get a conventional mortgage with a very low interest rate, or the lowest that you can get on the market today.

If you have a credit score that is well under 700, you might think that you cannot get a mortgage, or you will pay a much higher rate. There was a time that this was true, but things have changed.

With government backed mortgages, it actually is possible today to get a very low interest rate even if you do not have a high credit score.

One of the most popular programs for people with average credit scores is the FHA program. These mortgages are backed by the Federal Housing Administration. This agency guarantees the loan against default, so the lender is more likely to issue loans to people with lower credit scores.

The minimum credit score for a 3.5% down payment FHA loan is only 580, which is a very low score. It is more common for lenders to approve people with higher scores in the 620 to 680 range. While you may be able to find a lender to give you a loan at 580, it will be more difficult.

One of the best things about the FHA program is that because it is backed by the government, the lender is able to still give you a low rate. In fact, in some cases, your interest rate will be lower than the rate for a conventional mortgage.

For example, in 2017, it was possible to get an FHA mortgage with a rate in the 3.7% range, which was a tad lower than rates for conventional loans for people with high credit scores. This is a great deal for someone who has past credit problems.

While FHA will give loans with low rates to people with lower scores, that does not mean you can be financially irresponsible and still get a loan. You will need to show that you are stable financially, with sufficient income and are not missing any debt and bill payments on your credit report. Having a lower credit score from a past credit problem is ok in terms of getting approved for an FHA mortgage, but you need to show that you have regained a solid footing financially.

So, while having a high credit score does ensure you will get the lowest rates, it is possible to get a low rate even with an average to low credit score.