If you’re thinking about buying a house, you’ve probably noticed that mortgage rates are high these days. But average mortgage rates are exactly that: averages. Homebuyers will get an individualized rate based on factors like credit history and financial circumstances, which will push that rate up or down.
You can’t control the economic factors influencing interest rates. But you can get the best rate for your situation, and improving your credit score is the right place to start. Lenders look at your credit score to decide whether to approve you for a loan and at what interest rate. A higher credit score can help you secure a lower interest rate, maybe even better than the average.
Whether you’re looking to buy a house in the next few months or the next few years, monitoring your credit score -- and taking measures to improve it -- will pay off in the long run.
How a good credit score can get you a lower mortgage payment
When you’re looking at mortgage interest rates and annual percentage rates, or APRs, a difference of only a few tenths of a percentage point may not seem like a big deal. But even a slightly higher interest rate could equal tens of thousands of dollars more in interest over the term of your home loan.
The chart below shows how a range of credit scores might affect the payments on a 30-year fixed mortgage loan of $400,000.
| FICO score | APR* | Monthly mortgage payment | Total interest paid |
| 760-850 (Very good-Exceptional) | 7.642% | $2,836 | $620,908 |
| 700-759 (Good-Very Good) | 7.864% | $2,897 | $643,001 |
| 680-699 (Good) | 8.041% | $2,946 | $660,740 |
| 660-679 (Fair-Good) | 8.255% | $3,006 | $682,330 |
| 640-659 (Fair) | 8.685% | $3,128 | $726,170 |
| 629-639 (Fair) | 9.231% | $3,285 | $782,670 |
The difference of 100 points (a score of 660 versus a 760) on your credit score can mean a savings of more than $60,000 over three decades.
What credit score do you need to get the lowest mortgage rate?
A lot of lenders advertise mortgage rates and APRs online. But there’s a catch. Those advertised rates are usually only available to borrowers with credit scores of around 740 and above. So while you can qualify for a mortgage with a lower credit score (as low as 620 for most conventional loans), you’ll likely end up with a much higher rate than what’s on your lender’s website.
Keep in mind that each lender has its own formula and criteria for determining what mortgage rate you qualify for. However, you can assume that when you apply for a mortgage, the better your credit score, the more likely you are to get a lower interest rate and favorable terms, according to Patricia Maquire-Feltch of Chase Home Lending.
Why your credit score matters
You can think of a credit score as your financial report card. Credit scores reflect how well you use and maintain credit over time. If you practice good credit habits, it will be reflected in your score.
Your credit score tells lenders how likely you are to repay a debt, such as a home loan. Based on that three-digit score (and the information in your credit report), lenders determine if they should risk lending money to you, says Rod Griffin, senior director of consumer education advocacy at Experian. You’ll need a credit score of at least 620 to qualify for most conventional loans.
Beyond helping you qualify for a loan, your credit score will also have a significant influence on your mortgage’s interest rate and the monthly payments you’ll make.
Lenders generally reserve the lowest interest rates for homebuyers with the best credit scores who have a history of repaying their debts on time.
How to improve your credit score
Whether you have a credit score of 500 or 700, there are several steps you can take to increase your credit score. Boosting your credit isn’t a one-and-done project, but something you can work at over time. Here are some steps experts recommend to improve your credit score:
Pay on time, every time. Making all your payments on time is crucial. By setting up automatic payments linked to your bank account, you can reduce the risk of forgetting a payment.
Tackle debt. If you want faster results to improve your credit, pay down existing debt, especially high-interest debt from credit cards. Getting rid of credit card debt lowers your credit utilization (the ratio of all your outstanding balances to available limits).
Remove bad marks from your credit report. Monitor your credit report for errors, inaccuracies or fraudulent activity. You can get a free credit report from each of the three major credit bureaus (Experian, Equifax and TransUnion) once a year, and you can access a free report once a week from AnnualCreditReport.com.
Avoid having too many new accounts: If you open several new credit accounts within a short period of time, there can be multiple hard inquiries on your credit report, which can lower your credit score temporarily. It can also be seen as a potential risk by lenders.
Keep older accounts open and active. The length of your credit history affects your overall credit score, so the longer you keep accounts like credit cards open and in good standing, the more you’ll benefit. You can keep older accounts active by making one small purchase every month and paying it off immediately.
Maintain a mix of credit types. Having a variety of different credit types, such as credit cards and loans, can have a positive effect on your credit score. However, don’t open new accounts just for the sake of diversification if you don’t need them.
How long does it take to improve your credit score?
Even if you’re improving your finances, those changes might not be reflected immediately on your credit report and credit score. Building your credit score can take time and patience.
Your credit score might rise faster or slower than someone else’s depending on your current debt, your available credit and your history of missed payments.
Though most lenders regularly report information to the credit bureaus, some lenders only report your activity every 45 days. While instant results aren’t always likely, experts say you can usually move your credit score into a new range in less than one year.
What other factors determine your mortgage rate
Your credit score isn’t the only thing that matters when it comes to the interest rate you qualify for. Lenders also consider your debt-to-income ratio and your down payment:
Your debt-to-income ratio. While your credit score is the most important factor in determining whether you qualify for a mortgage, the amount of debt you have is a close second. Your debt-to-income ratio, or DTI, is the amount of debt you carry compared to your monthly pre-tax income. The lower your DTI, the better: Experts recommend aiming for a DTI ratio of 36% or less, if possible.
Your down payment. When you’re looking at mortgage rates online, the advertised rate usually assumes you’ll be making a 20% down payment. You’re not required to put that much money down, but it could affect the mortgage rate a lender offers you.
The loan term. A 30-year fixed-rate loan, which means you’ll be paying off your mortgage over three decades, is the most common mortgage. If you want a lower rate, you can try a shorter loan, such as a 15-year mortgage, though you’ll have more costly monthly payments.
The loan type. Different types of mortgage have different interest rates. Some loans have a fixed interest rate for the entire loan term, for example. Others have an adjustable rate that starts at the low end but then increases down the road.
The bottom line
Your credit score plays a big role in buying a house. Mortgage lenders and banks use it when considering what loan you qualify for and the interest rate that comes with it. Building your credit is always a good idea, and a better credit score is especially advantageous when you need to take out a mortgage in today’s high rate environment.
