In just a few months, mortgage rates have gone from just over 3% for a 30-year fixed loan to just north of 5%.
As potential buyers keep track of these numbers, there may be one thing they’re forgetting: their credit score.
The three-digit number has a big impact on the interest rate you’ll get on a mortgage. The higher the score, the lower the rate.
Credit scores range from 300 to 850. A good score is 670 to 739, a very good is 740 to 799, and 800 and above is considered excellent, according to FICO, one of the leading credit scoring companies. credit.
The mortgage rate for a 30-year fixed loan is now 5.15%, according to Mortgage News Daily. To get that rate, your credit score would typically need to be above 740, said Glenn Brunker, president of Ally Home, which provides mortgage services and products.
Less than 740 and lenders start adding more costs to reflect the additional lending risk, he said. This is either added to the interest rate or paid separately in points. One point equals 1% of your mortgage.
“It doesn’t sound that big, but when you think about adding an extra $20, $40, or $60 a month to your monthly payment because of a lower credit score, it can dramatically change your monthly budget and what you can afford,” Brunker said.
As mortgage rates are expected to continue to rise, consider lowering your credit score to take advantage of the best rates available. Here’s what you can do.
1. Check your credit report
Your credit report is basically a history of your credit activity and includes payment histories, credit card balances, and other debts. A number of factors on this report help determine your credit score.
Writing your report before applying for a mortgage or pre-approval, ideally a few months in advance, will give you time to fix any issues you find.
Traditionally, you are entitled to one free credit report per year from the three major credit reporting companies: Experian, Equifax and TransUnion. You can contact each directly or you can access them through annualcreditreport.com. During the Covid-19 pandemic, free access was increased to once a week – but that expires on April 20.
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Also keep in mind that on July 1, Equifax, Experian, and TransUnion are expected to remove all medical debts that have been sent to debt collectors and ultimately paid off.
“It could instantly improve someone’s credit score dramatically,” said Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
“A person with a good credit score could lose 100 points or more if they have medical debt.”
2. Pay your bills on time
Late or missed payments can cause your score to drop.
The easiest way to avoid this is to set up automated payments for your invoices.
“Consistency in paying bills on time will improve your credit score,” said Tom Parrish, head of retail lending product management at Chicago-based BMO Harris Bank.
3. Reduce your credit utilization rate
Lenders will consider whether you have high balances on your credit cards.
Even if you pay your credit card bills in full each month, you can still have high usage, Rossman said.
For example, if you make purchases of $3,000 and have a limit of $5,000, you are using 60% of your available credit. Try to keep it below 30%, Rossman said. Those with the best credit ratings keep it below 10%.
Making an additional payment in the middle of the billing cycle can help reduce the balance before the statement comes out.
4. Consider a credit-generating loan
Some community banks and credit unions offer credit-building loans, which are designed to help the holder establish good credit as they make their payments.
You will pay interest, although some lenders may refund the fee after the loan is paid off.
5. Watch for additional credit inquiries
If you are looking to buy a house, avoid other expensive items, such as a car.
Also, do not open new credit cards or lines of credit, which will lead to more inquiries for your credit problem.
“If you have a high level of inquiries, it lowers your credit score,” Brunker said. “It appears that you are actively seeking additional credit and therefore at higher risk.”
Weigh the decision
If you decide to increase your credit score before applying for a mortgage, keep in mind that interest rates may be higher when you try to obtain a loan. Again, house prices may fall.
“We don’t know what’s going to happen with long-term rates and house prices,” Parrish said.
Brunker suggests those with a credit score between 700 and 740 go ahead with buying a home, while making an effort to clean up their credit score. For those with lower scores, first ask yourself if homeownership is the right decision and if you understand the true cost of homeownership, he said.
“If the answer remains yes, I would consider taking a break for a few months,” Brunker said.
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