If there’s one factor that affects your mortgage rate the most, it’s your credit score. It’s often one of the first things lenders look at and one of the largest determining factors when they decide your level of riskiness. So what score do you need to get the best mortgage rate?
Unfortunately, there’s no defined answer to this question. The answer varies by lender. The bank funds your loan. In other words, if you default, they are out the money. They want to make sure that you pose as little of a risk as possible.
What Your Credit Score Tells Lenders
Lenders only want to lend to someone that has the ability and motivation to pay the loan back. You can tell them you will do this until you are blue in the face. However, they need concrete proof. Your credit score can provide this proof.
A high credit score means many things, including that you pay your bills on time. A few other things it tells lenders are:
- You don’t overextend yourself financially
- You have a good mix of installment versus revolving debt
- You don’t have extensive new inquiries
- You don’t have high outstanding balances versus your available credit
Each of these factors helps a lender see your level of financial responsibility.
The higher your credit score is, generally, the lower your interest rate. Will you get the best mortgage rate available if you have a good score? It depends on your other factors as getting a mortgage with a good rate requires the ‘total package.’
Your Other Qualifying Factors
Just having an 800 credit score doesn’t automatically qualify you for a loan. You have to show that you can afford the loan and that you don’t have a lot of other outstanding debts. You do this with proof of your income as well as a decent debt-to-income ratio.
Your income and debt ratio work together. Lenders need to see that you make enough to cover not only the mortgage, but your other debts too. They usually follow the below DTI guidelines:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 41% total debt ratio
- VA loans – 41% total debt ratio (they don’t have a maximum housing ratio requirement)
- USDA loans – 29% front-end ratio and 41% total debt ratio
If you don’t make enough money to cover your debts, your debt ratio will exceed the program’s requirements. This could make you ineligible for a specific program regardless of your credit score.
Manually Underwriting Your Loan
Lenders do have the option to manually underwrite your loans, though. Each loan program has software that automatically qualifies or disqualifies you for a loan. If you meet the requirements, you get approved. If you don’t meet them, you don’t get approved. However, the lender can choose to underwrite your loan themselves. A human underwriter will go through the file and determine why the automated underwriting turned you down.
If the underwriter feels that you qualify because you have ‘ compensating factors’ it could make up for a lower credit score or higher debt ratio. Compensating factors are things like:
- Assets on hand that you don’t need to qualify for the loan (use for closing costs or down payment)
- Low debt ratio
- High credit score
- Long-standing and consistent employment
- Consistent and/or increasing income
These are just a few of the things lenders can look at to help them overwrite an automatic loan denial.
Getting the Best Mortgage Rate
However, in order to get the best mortgage rate, you’ll want to give lenders the best possible scenario. A manually underwritten loan will likely have exceptions made. Lenders consider this a risk. You probably wouldn’t be privy to the best mortgage rate in this case.
However, if you have a high credit score, low debt ratio, consistent income, and consistent employment, you may qualify for the best rate available. It depends on the lender and their requirements. The best thing you can do is maximize your qualifying factors.
Starting months or even years before you apply for a loan, start working on your credit. Review your history to see if there are any negative factors reporting. Do you have late payments, collections, or negative economic events, such as a bankruptcy or foreclosure? If so, you’ll need time to rectify these situations. Oftentimes, time is the only thing that heals these issues. However, making timely payments and using your credit responsibly can help your score increase faster.
Working on your DTI will help too. Pay off as many debts as you can, while using your credit to show financial responsibility. In other words, use your credit cards, but only charge what you can afford to pay off right away. Take out an installment loan, but only one or two and make sure to pay them on time. These habits will help your credit score increase and stay high when you apply for a loan.
Getting the best mortgage rate relies heavily on your credit score, but on other factors as well. Making your application look as attractive as possible is the best way to get the lowest rate available to you.