The interest rate is often the most concerning component of a mortgage. People that shop for a mortgage focus solely on the rate. They shop with lender after lender until they find the lowest rate available to them. While this is a great strategy because the interest rate determines how large your payment is, you have some control over your rate simply by increasing your credit score. Your score has a great impact on the rate you are provided, which means if you know your score is low, it might be best to wait until you can improve it to lower your rate.
The Credit Score Breakdown
Most lenders look at credit scores in the following manner:
- Over 800 is considered excellent
- Between 750 and 799 is considered very good
- Between 700 and 749 is considered good
- Between 650 and 699 is considered fair
- Between 600 and 649 is considered poor
- Lower than 599 is considered very poor
Given the above chart, lenders adjust your interest rate accordingly. Typically, if you have a score in the excellent category, there will not be any adjustments made to the base interest rate provided to everyone. The rate tied into the particular program you applied for is what you will get unless you have other factors, such as a higher than average debt ratio or high LTV that make your loan riskier. If you fall in any of the categories below excellent, however; your rate will change accordingly. The further you get down the chart, the higher your rate may become.
How to Improve your Credit
If you have poor or fair credit, you might want to weigh the pros and cons of waiting to obtain a mortgage. If your interest rate will vary more than 1 percent because of your score, you might want to wait until you can increase your score. A few ways to do so include:
- Pay your balances down so that your utilization rate of available credit is lower
- Do not apply for any new credit to avoid inquiries from taking away points
- Make your payments on time
- Let more time pass after a negative credit event, such as a bankruptcy or foreclosure
These few things can help your credit increase dramatically. It will not happen overnight, however, so you will have to take your time and wait for the changes to occur. One last thing you can do is make sure that the credit reporting on your credit report is accurate. Human mistakes get made, which could mean that there are errors on your report. If this is the case, it is important to get them fixed right away. You can do this by contacting the appropriate credit bureau, either Trans Union, Equifax, or Experian, depending on which bureau is reporting the trade line incorrectly. Sometimes the bureau can get the evidence to change your report and other times you are responsible for finding the evidence and making the change happen.
In the end, your credit score has a large impact on your interest rate. You can control how much lenders need to adjust your rate to account for your level of risk. If you do not want to be considered high risk, start working on your credit score now. If you need a mortgage now, at the very least, shop around with different lenders to see who is willing to take your credit score risk at the lowest cost to you. Sometimes you can trade a higher rate for a one-time payment of a discount fee, which can be beneficial if you know you will be staying in the home for the long run.