Your credit score is one of the most important factors in the mortgage process. It affects not just whether you qualify for a loan, but also the interest rate you'll receive — which can translate to tens of thousands of dollars over the life of your mortgage.
How Credit Scores Work
Credit scores typically range from 300 to 850, with higher scores indicating lower risk to lenders. The most commonly used scoring model for mortgages is the FICO score, which is calculated based on five factors:
- Payment history (35%): Whether you've paid bills on time
- Credit utilization (30%): How much of your available credit you're using
- Length of credit history (15%): How long you've had credit accounts
- Credit mix (10%): The variety of credit types you have
- New credit inquiries (10%): How recently you've applied for credit
Credit Score Tiers for Mortgages
Different score ranges unlock different loan options and rates:
740 and above — Excellent
- Best available interest rates
- Most loan options available
- Lowest mortgage insurance costs
700-739 — Good
- Very competitive rates
- Wide range of loan options
- Slightly higher MI costs than excellent tier
660-699 — Fair
- Rates start to increase noticeably
- Some loan options may be limited
- Higher MI costs
620-659 — Below Average
- Minimum for most conventional loans
- Significantly higher rates
- Limited loan options
Below 620
- Conventional loans are generally not available
- FHA loans available with scores of 580+ (with 3.5% down)
- FHA loans with scores 500-579 require 10% down
How to Improve Your Score Before Applying
If your score needs work, start at least 6-12 months before you plan to apply for a mortgage:
Pay Down Credit Card Balances
Reducing your credit utilization below 30% — ideally below 10% — can significantly boost your score. This is often the fastest way to improve.
Pay Every Bill on Time
Set up autopay for at least the minimum payment on every account. Even one late payment can drop your score significantly.
Don't Close Old Accounts
The length of your credit history matters. Keep older accounts open, even if you rarely use them.
Don't Open New Accounts
Each new credit application creates a hard inquiry that can temporarily lower your score. Avoid opening new credit cards or taking out other loans in the months before applying for a mortgage.
Check Your Credit Reports for Errors
Request free reports from annualcreditreport.com and dispute any errors you find. Incorrect late payments or accounts that aren't yours can drag down your score.
The Real-World Impact
Consider this example on a $400,000 loan:
| Credit Score | Estimated Rate | Monthly Payment | Total Interest |
|---|---|---|---|
| 760+ | 6.25% | $2,462 | $486,320 |
| 700-759 | 6.50% | $2,528 | $510,080 |
| 660-699 | 6.75% | $2,594 | $533,840 |
| 620-659 | 7.25% | $2,729 | $582,440 |
The difference between a 760 score and a 620 score on this loan is $267 per month and nearly $96,000 over the life of the loan.
Getting Started
Understanding your credit is the first step toward homeownership. Pull your credit reports, know your score, and start making improvements today. When you're ready to apply, you'll be in the strongest possible position to secure a great rate.