How Your Credit Score Affects Your Mortgage Rate

Credit checks are a necessary part of applying for any loan, but they may never be as important as the day you apply for a mortgage. Mortgage lenders are entrusting you with a large amount of money, and it only makes sense that they want some assurance that they will get their money back.

Mortgage Lenders

Mortgage lenders take your credit score very seriously. A low score suggests that you may not be able to repay the money they lend to you, and it may result in an automatic rejection of your mortgage application. Generally, the better your score, the more options you have. You'll be able to buy with a lower down payment, access more varied types of mortgages, and pay lower mortgage interest rates.

Good Score? Lower Mortgage Interest Rate

How much lower will your interest rates be if you have a good credit score? This will vary from individual to individual. For example, assume you're planning a 30-year mortgage and your FICO score is 720, which is a very good score. Your interest rate may be among the lowest on the market. Now, let's assume your FICO score is quite a bit lower: only 550. Suddenly your interest rate is dramatically higher, or you may find yourself unable to even get a loan.
 
Why the difference? The lower score indicates a higher possibility of defaulting on the loan. A higher rate of interest is compensation to the lending institution for the increased risk.

My Score Was Fine. Why Wasn't I Approved?

It is possible that you may be refused a loan even with a good credit score. Even the best report in the world won't help if you're currently unemployed, or if the lending institution doubts that your current income will cover the cost of the loan. Remember, a good credit score doesn't necessarily indicate sufficient cash flow.

Credit Checks and Life

Your financial history will not only affect your chances of buying a house. Any loan requires a credit check, whether it is for a new car, home renovations, or a vacation.
 
Insurance rates may also be affected by your rating, as poor ratings usually mean higher premiums. Many colleges will consider your financial history before they approve student assistance programs. Even employment may be affected, as many employers require a credit check as a character reference before offering a position.

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