How does a drop in your credit score affect your mortgage rate?
When you apply for a mortgage, one of the most important factors that lenders consider to determine your loan terms, including your mortgage rate, is your credit score. In short, the higher your credit score, the lower your mortgage rate and the lower your score, the higher your rate.
Having a high credit score benefits you in multiple ways. First, your score makes you eligible for all mortgage programs. Second, qualifying for a lower mortgage rate reduces your monthly loan payment which saves you money. Plus, a lower rate enables you to afford a higher mortgage amount.
Having a lower credit score may make you ineligible for certain loan programs. Additionally, the higher mortgage rate you pay increases your monthly payment and reduces the mortgage amount you qualify for.
Simply put, a drop in your credit score may make your mortgage more expensive and limit the loan you can afford but the specific impact on your mortgage rate depends on the amount of the drop, what caused your score to fall and your loan program.
Most loan programs require applicants to meet a minimum credit score requirement to qualify. We outline the score required for some of the most common programs below:
The most “lenient” conventional mortgage program (HomeReady): 620
FHA mortgage program: requires a score of only 500 if you make a down payment of at least 10% and a score of 580 if your down payment is less than 10%
USDA home loan program: requires a minimum credit score of 640 for most applicants
VA mortgage program: technically has no minimum score threshold most lenders requires a score of at least 620 to qualify
The good news is that if your credit score drops but remains above the requirements listed above, you can qualify for these programs. On the other hand, if your score falls below these levels, you may be ineligible for the program or you made need to provide additional documentation to qualify. This takes more time and effort and there is no guarantee that your application will be approved.
In addition to impacting the loan programs you qualify for, a decline in your credit score may also affect your mortgage rate. Lenders have significant discretion in setting the loan terms they offer and mortgage rate pricing usually varies based on the credit score “band” you fall into. If your score drops into a lower band, your rate typically increases. The amount of the increase depends on how much your score falls, the lender, market conditions and other factors.
Below we outline how your rate may change, depending on your credit score. Although this information is illustrative, it helps you understand how a drop in your credit score impacts your mortgage rate.
Credit Score / Mortgage Rate Difference
740 - 850: Lowest rate
720 - 739: + 0 - 0.125%
700 - 719: + 0 - 0.125%
680 - 699: + 0.250% - 0.500%
660 - 679: + 0.625% - 0.750%
640 - 659: + 1.000%
It is very important to highlight that multiple inputs determine your mortgage rate and loan terms can vary significantly by lender. For example, a lender with aggressive pricing may offer an applicant with a 700 credit score a lower rate than another lender offers an applicant with an 800 credit score.
This is why you should always shop multiple lenders to find the best mortgage terms, especially if your credit score has taken a hit recently. We recommend that you contact multiple lenders in the table below to find the lowest rate and fees based on your individual circumstances.
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Additionally, the mortgage rates for government-backed programs such as FHA, VA and USDA mortgages are not supposed to vary based on your credit score. Not all lenders follow this guideline or find other reasons to charge you a higher rate but in theory a drop in your credit score should have a smaller or no impact on your rate.
Government-backed mortgages require you to pay upfront and ongoing (in the case of the FHA and USDA programs) mortgage insurance fees which add to your closing costs and monthly housing expense but these programs may represent a more affordable financing option if your credit score has dipped.
If your score dropped significantly then the FHA mortgage program may be an especially attractive option because of the lower minimum credit score it requires. You may be able to qualify for a mortgage without paying a significantly higher mortgage rate, although you should also factor in the added expense of the FHA mortgage insurance premium (MIP) you are required to pay.
The table below shows FHA mortgage rates and fees for leading lenders in your area. We recommend that you compare both FHA and conventional loan terms to find the program that saves you the most money.
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The final point to keep in mind when considering the impact of drop in your credit score on your mortgage application is the event that caused your score to fall. If your score fell due to a significant negative credit event such as a bankruptcy, short sale, default or foreclosure, you are required to wait before you can apply for a mortgage. The length of the waiting period depends on the event and the circumstances that caused it.
Review Waiting Periods After Negative Credit Events Before You Can Apply for a Mortgage
If you score dropped due to a late mortgage payment, you may also be required to wait before you can qualify for a new mortgage depending on the timing, frequency and duration of the late payments. If your score fell due to a charge off or collection, you are usually not required to wait before you can apply, but these items may impact your loan terms and the lender may require you to resolve them as a condition to approving your mortgage.
In conclusion, you can still qualify for a mortgage with a drop in your credit score and in some cases your mortgage rate may increase less than you expect. In addition to understanding the potential impact of the event that caused your score to fall, it is important to compare different lenders and loan programs to determine your best mortgage option.
Sources
"B3-5.1-01, General Requirements for Credit Scores." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
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