Effect Of Credit Score On Mortgage Rates and Monthly Payments

Did you know that 58% of people have FICO scores over 700? Here is the distribution, taken from myFICO.com:

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Although one’s credit score is only one of the criteria for getting the lowest rate on a mortgage, and every lender has their own unique qualification formulas, I wanted to see what the general relationship between credit score and the resulting monthly payments was. Here is some data taken from their Loan Savings Calculator using national average rates, a 30-year fixed rate mortgage, and a $300,000 loan balance.

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It would appear that once you reach a score of 700, you are pretty much getting the lowest mortgage rates available. And FICO seems to suggest that lenders don’t differentiate between someone with a 721 and someone with a pristine score of 820 or 830. The main goal is simply to reach that “good enough” level of the top 40% or 58%. After that, nobody cares. This agrees perfectly with my previous conversations with local mortgage brokers.

On that note, I also think a good one will tell you what you need to do, if you don’t qualify initially, to get the lowest rates. You shouldn’t go crazy beforehand trying to tweak your FICO to wring out 6 more points. Of course this works best if you already correct any major concerns, like errors on your credit report. Have you checked your free credit report from Uncle Sam lately? I haven’t, need to get on that…

Comments

  1. Yes, that’s what I thought as far as credit scores go — once you reach the point of “good credit”, you’ll probably qualify for the best rate on a mortgage. Of course, they like to charge 1/2 point higher depending on your loan to down payment ratio. So you have to have 20% down and good credit to get the best rate. And if you re-finance, some banks (my credit union) will want 30% equity before giving the best rate. And sometimes they even expect you to pay automatically each month out of your checking account to get their advertised rate.

  2. I found useful this book “How to save thousands of Dollars on Your Home Mortgage” by Randy Johnson. I bought my condo exactly one year ago.

  3. Ted Valentine says:

    Jonathan – Great job getting to the bottom of the credit score mystery.

  4. The best ways to increase your credit score are to always pay your bills on time (what a novel idea) and to never use more than 30% of your available unsecured credit.

  5. If they still exist, no-doc loans typically require scores of 740+ so I guess you could say that’s the last plateau to reach.

  6. We have a decent score but we got a 6.5 rate… I think our broker made a commission on that! Next time I buy a house I’m paying CASH!!!

  7. Clark Howard recommends getting your free report once every 4 months by alternating who you obtain the free report from. This allows you to track your credit report during the year. I once got all three at the same time, but I have since switched to one every 4 months.

  8. Thank you! This is good to know, especially for those with not great credit scores who are trying to improve their FICO. It’s hard to know what to improve it to without having a target. Once you know about these ranges, you then have a target to meet or exceed.

  9. For those looking to buy just raw land, you’ll need at least 50% down payment to even get the conversation going with a bank. Banks don’t like the thought of loaning money for something like country land that is risky to resell.

  10. wow more than 50% have 700+ credit score. I can’t believe it with all the borrowing people do and what is our overall consumer savings, wasn’t it negative at one time?

  11. i too find it very hard to believe that over half the population is in the 700+ range. most people i have encountered thus far in life are very irresponsible with money and lack any sort of financial sense. credit scores must be like grade point averages and sat scores – a less than accurate depictor of reality.

  12. RothNovice says:

    countrywide bank has 1 year cd for 5.65%
    remember not to keep more than 100K
    This bank could be in trouble

    I think deal ends end of the month.

  13. SavingEverything says:

    This may be a silly question… but, which credit score(s) get the mortgage rates that banks advertise on their webpages or posted in their lobby? Is the rate that the banks advertise, for example BoA, for those with excellent credit scores only??

  14. the-insider says:

    Jonathan,
    For mortgage and auto loans, FICO score is really only one component of the pricing. It provides a benchmark for lenders to understand relative creditworthiness of a customer. However, the actual pricing is a combination of what’s popularly known as Loan to Value (LTV), the term of the loan (15 vs 30 yrs to compensate the lender for time value of money) and debt to income ratio (DTI). Typically, DTI is calculated using the credit bureau data on your total existing monthly obligations and dividing it by gross monthly income. In the end, there’s typically a grid that offers the mortgage rate for a combination of FICO, LTV, DTI, and term of the loan.

    It’s becoming more and more common for lenders to develop their own “custom” statistical models based on data gathered on their own customers. These models are typically developed to provide a “lift” over FICO. There are subtle differences in the way people behave across localized housing markets and lenders try to maximize this information in predicting the risk of default.

    On another topic: Have you ever wondered (and for some people it may be obvious) that a FICO of 700 is good enough to get you a mortgage that is many times a typical credit line on credit cards, yet the long term interest rates on credit card is way higher than a mortgage loan? The answer obviously lies in the fact that mortgage is collaterilized by your house, but credit card is “unsecured” credit and the bank has no recourse to the money if one decides to default.

  15. Question to “Me”: when you got all three reports at the same time, did you notice any difference between the reports or the scores from the different bureaus? Or do all three score pretty much the same?

  16. Can anyone post a source on the countrywide bank trouble, please?

  17. SanDance: A couple years back I got all 3 scores at the same time before I started laddering my reports. They were all the same. None of them provide the actual numeric score. You have to pay extra to get that info. That’s how they make $$$. I bought the score for all 3 and they were about 20-30 points different from each other.

  18. “Population” means what Fair Isaac calls the “scored population” which is not the entire US population. The FICO score is a snapshot in time, so you don’t have one if you have never applied for credit or checked your score. In addition, you don’t have a score until your report has at least one account that has been open for at least six months AND at least one account that has been updated in the past six months.

    It’s very important to check all 3 reports regularly — they can vary enormously.

  19. Credit Scoring and repair can sometimes be frustrating. It should not be so difficult to dispute incorrect negative information, or get charge offs and collections rescored as it is. I Help my clients do this everyday and even though I communicate with the credit repositories frequently I still have trouble getting them to move as quickly as they need too. Again, It should not be so difficult, when it is so important to the comsumer and could cost or save them a lot of money.

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