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How to Determine a Mortgage Rate Using a Credit Score

by Bridget Gannon Smith

Overview

When applying for a mortgage, the first order of business for your loan officer will be to check on your credit rating score. There are three credit agencies (Experian, Equifax and TansUnion) that collect information on your borrowing and payment histories and compile them into a credit report. This information is gleaned from the lenders that have given you a loan, credit cards or any other type of credit. The Fair Isaac Corporation (FICO) is the major producer of the credit scores, which is why they are sometimes referred to as FICO scores. When you apply for a loan, the lender has the right to access this information.

Step 1

Determine your credit score by getting a copy of your credit report with score. FICO collates all the information from the credit reports and applies an apparently secret formula to arrive at a credit score for each individual; it considers payment history, amounts owed, credit history duration, new credit and type of credit used, with payment history having the highest percentage allocated to it. The credit scores range from 300 to 850, with 850 being the best score and 300 not worth the paper it's printed on.
Step 2

Pull up a link to a mortgage rate loan savings calculator . A great reference for this tool can be found at myfico.com. Enter your loan type in the menu. Put your loan details in place---length of the loan itself. Enter the principal (total amount) of the loan you would like to take out. Finally, enter your credit score range from the drop down menu provided on the site. This will then calculate which type of interest rate you will qualify for, based on your current credit score, and what your monthly payment would be on the loan.
Step 3

Think about if there is any room or time for improving your credit score so that you can qualify for a lower interest rate. With a credit score in the 760 to 850 range, you can expect lenders to fall over themselves to get your business, provide the best interest rates and offer a variety of loan options. With a score of 620 and below, you can expect higher interest rates and not so many loan options. If your score is below 500, you need not even bother applying for a mortgage.

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Mortgage rate loan savings calculator
Mortgage rate loan savings calculator
Lenders want to loan you money in the form of mortgages because the interest charged is their way of making money. As an incentive, they offer the lowest rates to the people with the highest credit rating scores. However, they cannot afford to lose if you don't pay; hence, they charge higher rates of interest to people who have lower credit scores to safeguard their payments. If your credit report shows that you have a history of missed or late payments, the lender is not comfortable giving you a mortgage; if you cannot pay your existing loans, how can you pay off a new loan? Strive to achieve the highest credit score you can before applying for a mortgage. This will save you money in the long term.
Lenders want to loan you money in the form of mortgages because the interest charged is their way of making money. As an incentive, they offer the lowest rates to the people with the highest credit rating scores. However, they cannot afford to lose if you don't pay; hence, they charge higher rates of interest to people who have lower credit scores to safeguard their payments. If your credit report shows that you have a history of missed or late payments, the lender is not comfortable giving you a mortgage; if you cannot pay your existing loans, how can you pay off a new loan? Strive to achieve the highest credit score you can before applying for a mortgage. This will save you money in the long term.