Your credit and your mortgage

Your credit score has a substantial impact on whether or not you’re approved for a mortgage ― it will also affect the amount you are offered and the interest rates of the loan.

• FREE: Check your 2013 Equifax Credit Score
• FREE: Check your 2013 TransUnion Credit Score

When you apply for a mortgage, the lender will request your credit score because it is a good indicator of your risk as a borrower. Your score reflects how you’ve handled credit obligations in the past, thus allowing mortgage lenders to estimate your likely future performance.

Each mortgage lender has different credit score requirements, so it’s a good idea to shop around. There is no standard “cut-off” credit score, although you’ll probably need a score of 740 or more to qualify for a conventional mortgage loan with decent rates. Also remember there are several factors besides your credit score, including your debt-to-income ratio and the down payment, involved in this process.

Bad credit doesn’t mean you won’t get a mortgage loan at all ― but if you do get a loan, you’ll probably have to make a larger down payment and you’ll be charged a higher interest rate. Those with weak credit scores can turn to special mortgage programs such as FHA loans, which are backed by the federal government (the average credit score of an FHA borrower is 690).

A good credit score can lead to good interest rates. In general, the higher your score is, the lower your interest rate will be. For mortgages, which are hundreds of thousands of dollars, even a single percentage point difference can add up to a lot of money. According to Consumer Reports, “Over the life of a [$150,000] loan, the people with the best credit scores may pay roughly $138,000 less than those with the worst.” That means a borrower with a bad credit score could end up paying nearly twice as much interest for a mortgage loan than someone with a great credit score!

A credit score of 740 of more should qualify you for a good mortgage rate.  If you have an excellent credit score (760 or higher), you may be able secure a loan with a low-down payment, or even no-down payment. Conversely, if you have a weak credit score, you may be able to substitute that with a large down payment (25% to 30% or more) to get a mortgage loan.