Your Credit Score & Your Mortgage Rate

How Your Credit Score Affects Your Mortgage Interest Rate

I have had some financial problems in the past and I’m afraid my credit score has been damaged.

I have straightened things out recently and have married. I would like to buy a house or condo.

How will my past problems effect the cost of my mortgage?

Mark

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It’s hard to tell with so little information. First of all I don’t know how long ago you had your problems. If they were within the last few months, they will effect your ability to borrow more than if they occurred twelve or more months ago. With credit scores, you more recent history carries more weight than older events.

Also, I don’t know how bad your problems were. Did you go bankrupt or merely miss a few payments? Did you default on any debts or were you late making payments for a few months? Each one of these actions will effect your score differently.

Anyone shopping for a mortgage should get a copy of their credit report and score beforehand. I would suggest that you do so. It may be better than you think. Go to Free Credit Report to take advantage of its trial offer and get your credit report and score.

Or if you want to save some money, you can learn how to get your free credit report - not credit score - in Your Credit Report.

Once you learn your score you will be in a position to make a pretty good guess at what interest you will be charged on a mortgage. In today’s (May 2005) market, mortgage rates for those in the top or prime category, with a score above 720, will be around 5.716%.

As your score declines your rates will increase. For those in the second tier, with a score between 700 and 720, rates will go up to around 5.84%; for those in the third tier, with a score between 675 and 699, rates will be about 6.379%; for those in the fourth tier, with a score of 620-674, rates will be about 7.529%; in the fifth tier, with scores in the area of 560 to 619, the rates increase to 8.531%; finally for those with the lowest scores, 500 to 559, the rate jumps to 9.289%.

On a $150,000 mortgage, your payments will be between $872 and $1238, a $366 difference. So you can see what a bad credit score can cost you.

If your score is really poor, you can rent for a year or two to build your credit score up by maintaining a perfect credit record. Pay all your bills on time and limit your use of debt to a fraction of what’s available to you.

Now, in April 2008, people in the lower tiers probably will not be able to get a mortgage at any price.

If your wife’s credit score is good and she has sufficient income perhaps you can borrow on her credit only. The house may have to be titled in her name only, but if this saves you money, why not?

No matter what your score, shop carefully for your mortgage.

If you wish to provide more information, maybe I can be more specific.

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