How Your Credit Score Affects the Interest Rate on Your Mortgage

There are a number of ways to find the best mortgage rate; however, it may require a little work on the borrower’s behalf. Often times, the mortgage rates you see advertised are the “best-case scenarios,” and not always the rate offered to most borrowers.

The best rates are typically offered to borrowers with a 740+ credit score, who are purchasing or refinancing a primary residence that is a single-family house. Borrowers with credit scores between 701 – 739 would benefit by working to increase their scores. How do you do that though? What makes up your overall credit score? Read on.

Your payment history has the largest impact on your score - it’s important to pay your accounts on time. Late payments, past due accounts and bankruptcies have a negative impact and can/will lower your scores.

The second largest element is your DTI ratio and available credit - this means how much you owe on all accounts, which accounts carry a balance and what percentage of available credit is being used. If your revolving accounts have high balances, one way you help is to pay down some of the balance before applying.

(The DTI is calculated by dividing your minimum monthly debt into your gross monthly income.)

The next element of importance is the length of time you have had the credit lines open. Closely review any revolving credit accounts before you decide to close them. You may want to just keep a zero balance to benefit from the length of time you have had the account opened.

The last two elements are the type of credit used and new credit. You need a good mix of installment loans, revolving credit and mortgage loans that are all kept current. New credit needs a good 12-months’ worth of good pay history to see the most benefit.

If you are interested in knowing what you qualify for, we would love to talk with you and discuss what options are available. For more information, click here.

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