The wild, Wild West days of mortgage interest rates crashing below 3% are long gone — and will likely remain long gone for a long time. But the good news is that with the Fed set to cut the federal funds rate for the first time since March of 2022, savvy homeowners can now put themselves in position to take advantage of this pending mortgage interest rate drop and get a great mortgage rate.
Understanding credit ratings
As you well know, for securing a mortgage, your credit score is key to unlocking the best interest rates. While you do not need a perfect score of 850 to get the best deal, it needs to be sufficiently high enough such that you do not look like a risk to the mortgage lender.
That is the whole purpose of the credit rating system.
Lenders use your credit score to assess the risk of lending you money; the higher the score the less of a risk you are perceived to be. That, in turn, translates into better loan terms, including lower interest rates.
Conversely, a lower credit rating typically signals a higher risk, thereby leading to higher interest rates or even difficulty in securing a loan altogether.
The ideal credit score range for the best mortgage rate
For those aiming to secure the best mortgage rates, the magic number is 760 or above; lenders reserve their most competitive rates for borrowers with credit scores in this range. It may surprise you that you do not have to have a perfect credit score of 850 to get the best rate (or even be in the top tier of 800 to 850) but that’s the fact. Here is a breakdown of how credit score ranges can impact your mortgage interest rate:
- 760 and above: To get the best rate possible on a mortgage, you will need a score of 760 or above. At this level, lenders see you as a low-risk borrower, meaning you can enjoy the lowest interest rates.
- 700-759: You will still get a very good rate, though it will be slightly higher than those in the top tier.
- 660-699: Borrowers in this range will face moderately higher interest rates, translating into higher monthly payments.
- 620-659: In this range, you will encounter noticeably higher rates, and some lenders may be hesitant to approve your application.
- Below 620: Securing a mortgage will be challenging at this level (although you may qualify for government-backed mortgages, like FHA loans), and if you do get one, the rates will be significantly higher.
The impact of a few points
While you may think that a few points here or there should not make much of a difference in your mortgage rate, the fact is, it does.
For example, raising your score from 680 to 700 takes you from a middle tier to the second-highest tier. That offers you the likelihood of a better interest rate, potentially saving you thousands of dollars over the life of your loan.
The bottom line
By understanding where your score stands and then taking steps to improve it, you can increase your chances of securing the best possible terms on your mortgage, saving you a lot of money in the long run.
Here are a few ways to improve your credit:
- Pay down outstanding debt, especially credit card debt.
- Better yet, pay off whatever you can.
- Check your credit report to see whether there are any mistakes or outdated information contained there. If so, contact the credit agency and ask to have it removed (and provide proof). By law, credit bureaus have to remove the false items within 30 days if you are correct.
A perfect credit score, or even being in the highest tier, is not necessary to get a great mortgage rate. Instead, the trick is to be in the highest range: 760 to 850. Getting there can make a big difference. And it is important to try to do that.
