How Credit Scores Impact Your Mortgage

Buying a home is one of the biggest financial decisions you’ll make, and your credit score can shape the entire journey. It plays a role in whether you’re approved for a mortgage, how much a loan costs, and how smooth the process feels from start to finish.

Let’s look at the connection between credit scores and mortgages to see how you can position yourself for the best possible mortgage loan.

How Credit Scores Affect Your Mortgage Rates

Lenders use your credit score to estimate how likely you are to repay your loan. Lower scores indicate a higher risk of missing payments or defaulting on loans, so lenders charge higher interest rates to offset this risk.

Mortgage lenders typically offer their most competitive rates to borrowers with credit scores of 740 or higher. As scores drop, rates tend to increase, especially for borrowers with scores below 620, where lenders perceive a greater risk.

Even a slight difference in your rate can have a big impact. Shaving just half a percentage point from your rate can save you around $100 per month on a typical $400,000 mortgage. Over a 30-year mortgage, that adds tens of thousands of dollars.

How Credit Scores Affect Your Loan Options

Some loan programs are simply off the table if your credit score is too low. Take conventional mortgages, for example. These loans follow guidelines set by Fannie Mae and Freddie Mac, and the minimum credit score for a conforming conventional loan is typically 620.

There are also nonconforming conventional loans — sometimes called “jumbo loans” — that don’t meet Fannie Mae and Freddie Mac standards because they exceed local loan limits. You may need a credit score of 700 or higher to qualify for a jumbo loan.

A low credit score doesn’t mean you can’t get a mortgage, but you may have to shop around. One place to look is the Federal Housing Administration (FHA). The minimum credit score for an FHA loan is typically 500, while borrowers with credit scores of 580 or higher can secure a loan with a down payment of only 3.5% of the home’s value.

However, please note that these are the minimums set by the Department of Housing and Urban Development, the agency that oversees the FHA. Some lenders apply stricter requirements, known as overlays, which may include higher credit scores.

How Credit Scores Affect Documentation

It’s no secret that mortgages typically require a lot of paperwork. But if you have a lower score, you can usually expect even more.

That’s because lower scores tend to draw greater scrutiny as the lender assesses its risk. If your score is on the lower side, your lender may want additional documentation, such as:

• Proof that your income is stable and sufficient.
• Tax returns for multiple years.
• Additional employment verification.
• Written explanations for derogatory marks on your credit report, like late payments or accounts in collections.

Borrowers with higher scores may qualify with just recent pay stubs, W-2s, and bank statements, especially if they have low debt and stable employment. Some lenders might even waive certain documentation requirements altogether if a financial profile looks particularly strong.

How Credit Scores Affect Lender Flexibility

Mortgage lenders typically follow strict guidelines, often established by government-sponsored entities such as Fannie Mae and Freddie Mac, when determining whether to approve a loan. These guidelines cover credit scores, down payments, income, and debt-to-income ratios.

However, lenders may be more flexible if your credit score is high. For instance, if one part of your application is weaker — such as a limited down payment — a stronger credit score might help offset the risk and keep your loan within acceptable limits.

High credit scores can create more room for flexibility because they affect how easily the lender can sell the loan. Lenders typically sell a mortgage loan to investors. A better credit score makes a mortgage more attractive to those investors, which may increase the chances that the lender will approve it.

What You Can Do Before You Apply

As a potential borrower and hopeful homebuyer, you want to make sure your credit score is in good shape to make the mortgage process more manageable.

The first step? Check your credit score now to see where you stand. You can get a copy of your credit report from each major credit bureau (Equifax, Experian, and TransUnion) by going to AnnualCreditReport.com.

If your score needs a little polishing, you might want to:

• Pay down your credit card balances.
• Dispute errors on your credit report.
• Pay your bills on time.
• Avoid making major purchases or opening new accounts.

Improving your score can take a few months, but it may be worth all the effort if you get a good deal on your mortgage.

Set Yourself Up for Mortgage Success

Your credit score influences more than just your mortgage rate. It shapes your entire experience, from the type of mortgage loan available to the paperwork you’ll need to get it. But remember — you have control over your credit score, and that can mean more options, better rates, and less stress.

Check out Old National's mortgage options.

This article was written by Kimberly Zhang from Under 30 CEO and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.