Does Lower Credit Report Score Mean Higher Interest Rate Mortgage? |
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A credit report score is a three-digit number that determines whether your mortgage loan will be approved or not and the interest rate, if the loan is approved. It is based on your history of bill payments, debt profile and other statistical information that indicates the credit behavior and the likelihood of payments being made on
time. Obtaining the mortgage at a lower interest rate is very significant as the lowering of even one point of the interest rate can result in a saving of $5000 on a 15-year mortgage and about $50,000 on a 30-year mortgage. In your credit file, the most important information is your credit report score, which will ultimately determine the interest rate that you will pay when you borrow money. Lenders use your credit report score in their lending decisions because there is a direct correlation between your credit report score and the chances of your defaulting on your monthly mortgage payments. The chances of your becoming 90 days delinquent are 576 to 1 if your credit report score is 780 and the odds are 288 to 1 if the score is 700 and if the score is below 630, the odds are 18 to 1 and so on.. The above example shows that people with credit report score below 630 are high risk customers and as such the interest rate on their mortgage will be very high and their monthly mortgage payments would be higher by about $50 to $250 and thus the price of their home will go up by thousands of dollars. To get a mortgage loan easily, your credit report score should be above 660. Moreover, the higher your credit score the lower will be the interest rate. Hence, you should try to have a credit report score of at least 700. If it is between 700 and 724, the interest rate will be lowered by 1/8th of a percent as a reward by the lender and if the score is above 725, you will be rewarded with a lowering of the interest rate by about a quarter of a percent. Lowering of the interest rate by even a point can make a big difference in the price of the house. On a typical $150,000, 30-year mortgage loan, an increase of just two points of the interest rate will mean paying an additional $200 every month, which will result in the price of the house going up by $72,000! Automated underwriting (software) is used for most mortgage pre-qualifications/approvals and as such the borrower's credit report must be accurate. The software cannot understand any excuses or causes for late payments and so it is important to ensure that the credit report is accurate to be able to get the mortgage approval. The credit report score generally ranges from 300 to 850 with most scores falling within the 600s and 700s. The higher the credit report score, the better the credit rating. A credit report score of 620 is the boundary between a standard loan and a higher cost loan, which is also known as a sub-prime loan. With a higher credit report score, you can obtain credit more easily and on better terms than someone with a lower credit score. To overcome a low credit report score and raise your credit report score, you can take the following steps: --To lower the amount of money that you are borrowing, you should offer a larger down payment --Before applying for a mortgage loan, you should lower your debt-to-income ratio by paying off as much debt as possible --Avoid buying a car just before applying for a mortgage loan as this will lower your credit report score --Improve your credit report score Improve your credit report score by using the above steps and then you will qualify for lower interest on your mortgage loan. |
