Buying a house is an exciting moment in life. Many people spend time picking out the perfect home, imagining their futures, and sorting their finances, all building up the anticipation in the process. But that excitement is often derailed by confusion over mortgage rates, especially when borrowers are unaware of the link between prices and credit scores.
But before you get too far into the process, take some time to truly understand how credit scores and mortgage rates relate, giving yourself some peace of mind.
What is a Mortgage Rate?
Let’s start with the basics. A mortgage rate is essentially an interest rate, or the percentage of interest you’ll pay on your home loan. These rates can be fixed or variable, meaning they can adjust throughout the loan. Most borrowers looking for a home loan want a low, fixed mortgage rate. But when determining loan conditions, lenders will look at your credit score.
Credit Scores and Mortgage Rates
When you have a low credit score—think below 620—it’s much more challenging to get approval on a home loan. But if you do qualify, the higher the score, the better the terms of the loan. Better loan terms mean a lower interest rate, aka a lower mortgage rate. The difference between a low and high credit score could result in up to a 0.5% difference in your mortgage rate. With such large sums of money over many years, this can add up to a lot.
Understanding Low Credit
Low credit isn’t the only factor that determines the mortgage rate, but it is an important one. Lenders want to assess their overall risk, so if you have a low credit score, that doesn’t necessarily mean you are out of luck. You can still qualify for a loan and negotiate a decent mortgage rate. But first, you’ll need to get to the bottom of why your credit score is low.
Many consumers feel frustrated with understanding credit scores. But remember that you aren’t alone in the process. Many tools can help you to follow your credit trail, including the use of consumer lawyers. Law firms can assist borrowers in understanding credit history, how it impacts loans and rates, and discover any discrepancies. Those with low credit scores often work with consumer lawyers and detect credit reporting errors, which have lowered their ratings unjustifiably.
Because of the logistics of credit reporting, errors happen more often than we think. These errors can lower your score, making it more difficult to obtain loan approval or receive higher interest rates. Consumer lawyers are an excellent partner in determining why your credit is low and if any errors are impacting your score. Further, they’ll help you dispute any errors with the credit reporting companies.
Again, credit scores aren’t the only factor influencing mortgage rates, but they do have a tricky relationship. If you have a lower credit score, consider tracing your credit to dispel any errors and discuss your overall credit history with your lender.