Get a mortgage with good (but not great) credit.

Get a mortgage with good (but not great) credit.

It’s no secret that home buyers need good credit to qualify for a mortgage. But is “good” credit enough or is “excellent” credit necessary?

The answer is that excellent credit it is not required but may help you qualify for a slightly lower mortgage rate. That lower rate could result in real savings over the life of the loan. But again, emphatically, “excellent” credit. it is not required to be approved.

Dig deeper:

Half of consumers have “good” credit.

In 2023, only 21% of consumers had an “outstanding” score (800 to 850), while 28% had a “very good” score (740 to 799) and 22% had a “good” score (from 670 to 739). , according to credit bureau Experian.

Collectively, 50% of consumers had “very good” or “good” credit scores, while less than half had “exceptional” credit scores. If lenders limited mortgage loan approvals to consumers with “exceptional” scores, they would have far fewer customers than those who could approve loans with looser guidelines.

Dig deeper:

How your credit score affects your mortgage rate

Now, let’s say you want to buy a home and your credit is “good” or “very good,” but not “exceptional.” How much difference will it make in the mortgage rate and terms you are offered?

The short answer is that it will make more of a difference in the long term than month to month.

Loan-level pricing adjustments

To understand why, you need to know that while mortgage lenders independently set their own rates, Fannie Mae, for example, provides lenders with specific information showing rate adjustments for different types of conventional loans and different loan situations.

Dig deeper:

Among these guidelines are rate adjustments based on your down payment and credit score. As your down payment gets smaller, your credit score becomes an increasingly important factor in the rates you’ll be offered.

With an “exceptional” credit score, for example, you might be offered a rate of, say, 6.125% for a conventional 30-year fixed-rate mortgage to buy a $450,000 home with a 10% down payment. With a “very good” or “good” credit score and all else being equal, your best rate offer might be 6.25%, 6.375% or 6.5%.

The dollar difference

With the “exceptional” credit rate of 6.125%, your monthly principal and interest payment would be $2,609 and your total interest expense would be $120,097 for the first five years of the loan term.

With the “good” credit rate of 6.5%, your monthly principal and interest payment would be $2,708 and your total interest expense would be $127,717 over the five-year period.

The dollar difference amounts to $7,620 in interest over the five-year period and just under $100 per month.

Your credit score also impacts mortgage insurance

Your credit score can also affect the amount you may have to pay (MI) as part of your monthly payment if your down payment is less than 20% of the home’s value. A higher credit score may mean a lower cost to MI with the same down payment and loan type.

Other factors that affect the mortgage rate

Your credit score is just one of several factors that determine whether you will be approved for a mortgage and, if so, what rate and other terms you will be offered.

Other factors may include:

  • The state in which the house you wish to purchase is located

  • The selling price of the house

  • Your and the loan amount

  • The term of your loan (for example 30 years or 15 years)

  • Your rate type (e.g. fixed, hybrid or variable)

  • The type of loan you want

  • Your credit history with the lender

  • Your income, your assets and your savings

  • The total of your monthly debt payments compared to your monthly income

  • Whether you choose to pay discount points to lower your fare

The bottom line is that you can get a mortgage and buy a home without having an “exceptional” credit score. While you may be offered a lower rate with an “exceptional” rating, it does not need to be approved.

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