How Your Credit Score Affects Your Mortgage Rate

You likely already know that credit scores and mortgage rates go hand in hand. The higher your credit score, the likely you'll more easily qualify for a mortgage with a favorable interest rate and loan terms.

But what happens when your credit score isn't quite where you want it to be? When that happens, lenders might see you as a riskier borrower and charge you a higher interest rate on your mortgage. In turn, this could cost you money over the course of your loan term.

Read on for more information about how credit scores and mortgages are related and how you can start working to improve your credit and mortgage interest rate.

Mortgage Rates By Credit Score

A borrower’s credit score can drastically affect their mortgage terms. Let's define a few key terms you’ll need to know when applying for a mortgage.  

Annual percentage rate (APR): APR represents the annual rate someone gets charged to borrow money, along with the associated interest rate and fees. In other words, it takes more than just total interest into account – it encompasses everything you'll pay over the course of your mortgage term.

FICO^® Score: A FICO^® Score shows a lender how reliable you are in repaying the loans you take on. It is a three-digit number generated from information in your credit report. These scores range from 300 – 850, 850 being the highest credit score possible and 300 being the lowest possible credit score.

30-year fixed-rate term: This is the amount of time a borrower would repay a loan, with an unchanged interest rate. Terms can be 30 years, 15 years or shorter depending on your financial circumstances.

Minimum Credit Score Requirements By Loan Type

Different types of loans have different minimum credit score requirements in order to be eligible for that particular type of mortgage. We'll describe the type of mortgage and the minimum credit score you need to qualify for that particular loan below:

• Federal Housing Administration (FHA) loans: FHA loans are loans insured by the Federal Housing Administration. Many borrowers who have a lower credit score or down payment apply for this type of loan. You must have at least a 500 credit score to be eligible for an FHA loan. Specifically, if you have a 500 – 579 credit score, you must also bring a 10% down payment to the table. If you have a 580 credit score, you must have a 3.5% down payment.
• Conventional loans: No government agency or entity backs conventional loans, meaning that you must have a higher credit score and more money saved for a down payment compared to federal agency-backed loans. You must have at least a 620 credit score to qualify for a conventional loan.
• Department of Veterans Affairs (VA) loans: The U.S. Department of Veterans Affairs insures VA loans and the federal government backs them. You must also be a qualified veteran, active-duty service member or surviving spouse. Lenders do not have an industry standard requirement that they use for VA loans, but Rocket Mortgage^® requires at least a 580 credit score.
• U.S. Department of Agriculture (USDA) loans: The U.S. Department of Agriculture (USDA) backs USDA loans – they are for borrowers who plan to live in a qualified rural area and have an income that falls below 115% of the area's median income. Similar to VA loans, lenders do not have an industry standard requirement for USDA loans. However, many lenders require at least a 640 credit score.

Jumbo loans: Jumbo loans, also called jumbo mortgages, are mortgages that exceed the limits set by the Federal Housing Finance Agency (FHFA). They are nonconforming loans, which means they don't have the guarantees that come with conforming loans, whose limits go up to $766,550 in most of the country in 2024. In certain areas of the country, like Alaska and Hawaii, conforming loan limits reach as high as $1,149,825. Jumbo loan borrowers may face higher borrowing costs and interest rates. Depending on their loan amount and purpose, jumbo loan borrowers need to have a minimum FICO^® Score of 680.

Mortgage Opportunities For Low Credit Scores

If you have a lower credit score, you may want to explore certain types of mortgages, particularly home loans backed by the federal government. Federal government loans improve access to homeownership for individuals who don't qualify for conventional loans, including first-time home buyers.

Consider the following mortgage types if you have lower credit scores:

• FHA loans
• VA loans
• USDA loans

Fannie Mae and Freddie Mac also offer opportunities for borrowers. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that guarantee mortgages in the U.S. and stabilize the mortgage finance system by supplying funds to banks and mortgage companies that offer housing loans. They offer several first-time home buyer and low-income borrower programs, including the HomeReady^® loan and the Home Possible^® loan.

Tips For Improving Your Credit Score

Ready to get your credit score in tip-top shape to qualify for a home? Following these tips can help you boost your credit score and save you money on your home loan and other future loans.

Stay Under Your Credit Limit

Maxing out your credit means using your credit all the way up to the limit. For example, if you have a $10,000 credit limit on a credit card, maxing out your credit means you'd put $10,000 on your credit card.

A high credit utilization (expressed as a percentage) sends certain messages to lenders – it tells lenders that you may default on a loan because you consistently creep up on your limits.

Try to keep your credit usage to 30% or under. In other words, if your limit is $10,000, your total balance should not exceed $3,000.

Keep Current With Payments

One of the best ways to improve your credit score involves making on-time payments. You want to make all payments on all loans on time, whether you have revolving credit (credit cards) or installment credit (student loans and personal loans). Making your payments on time is important because your payment history makes up a large factor in your FICO^® Score.

Consider setting up automatic payments to ensure that you make all your payments on time. Your creditor or lender may be able to move your payment date so they align more with your pay date.

Focus On Credit History

A short credit history can negatively affect your credit. What is a short credit history? It means that you don't have a long history of paying off debt. The longer history of on-time payments can build your credit score. Credit scoring models take into account:

• Length of credit accounts established
• Type of credit accounts
• How long it's been since you used certain accounts
• Consider keeping older credit accounts active so as not to negatively impact your credit.

Dispute Errors On Your Credit Reports

Mistakes can destroy your credit. Check the errors on your credit reports to improve your score by checking your free credit reports from the major credit bureaus. Mistakes might occur, including payments incorrectly marked late, someone else's credit activity on yours and old negative information.

Avoid Taking On New Credit

If you're tempted to take out a loan for new furniture or a new car, consider avoiding opening credit accounts, because they can negatively affect your credit score. Applications lead to hard inquiries. Opening an account can hurt your score, sending lenders signals that you take on too much credit.

Play Catch-Up On Old Accounts

If you've been letting old debt sit around, make payments on it to bring it current. A late payment can remain on your credit report for years, and paying it all off stops further late payments from being added to your credit history as well as late fees. If you need help handling old debt, consider talking to a credit counselor to help you negotiate lower payments and interest rates.

Credit Scores And Mortgage Rates: FAQs

Let's look at a few frequently asked questions about credit scores and mortgage rates.

What credit score do I need to qualify for a mortgage?

The credit score you need to qualify for a mortgage depends on the type of mortgage you're interested in pursuing. However, most lenders look for at least a 620 credit score for a conventional mortgage, while government-backed loans typically allow you to bring lower credit scores to the table.

What is a good credit score by age?

As we mentioned, FICO^® Scores range from 300 – 850. A good credit score falls within that range, specifically between 670 – 739. A good credit score will qualify you for all the loan types we listed above – FHA, conventional, VA and USDA loans.

What affects mortgage interest rates other than credit score?

The mortgage interest rate you receive depends on more than just your credit score. Lenders also consider your loan term and type, their own requirements and your financial situation. For example, they'll also look at your income, employment history, assets, existing debt and down payment percentage.

Don't forget that if you plan to borrow with a co-borrower, their credit scores will also be considered alongside yours, so you won't be the only one in the equation.

How much does your credit score affect your mortgage rate?

Your credit score affects your mortgage rate because they show lenders how you've previously managed your debts. Adverse credit events like bankruptcies, foreclosures, delinquent accounts and debt from the past can be major red flags for lenders. However, it's also important to understand that your credit score isn't the only factor lenders consider.

For example, you may have other positives that balance out your lower credit score, such as a reliable income. Ask your lender for more information to understand precisely how your credit score ties into your personal situation.

The Bottom Line

Buying a home is one of the most important decisions you'll ever make, and there's a definite correlation between your credit score and mortgage rates. Understanding how a credit score affects your ability to qualify for a mortgage can make a huge difference in your home purchase journey.

Why is it important to understand the correlation between credit score and mortgage rates? The higher your credit score, the lower your APR and monthly payments may be. Over time, having a higher credit score can save you money on your mortgage.

To get mortgage ready, stay under your credit limit, keep current on your payments, lengthen your credit history, dispute errors that you see, avoid taking on new credit and play catch-up on old accounts to boost your score.

Ready to see what you qualify for? Start an application with Rocket Mortgage^® today.