When lenders review your application and set the interest rate for your mortgage, one of the most important factors they consider is your credit score.
The three major credit bureaus – Equifax, TransUnion and Experian – collect information on consumers from financial institutions and other sources. If you have a good credit history – you pay your accounts on time and don’t overextend your borrowing – that information is in their files. On the other hand, if you’ve missed payments on your car loan, maxed out your credit cards or had your credit accounts turned over to a collection agency, that will also be reflected in your credit file.
To generate your credit score, the bureaus take the information in your file and run it through a mathematical formula. Your score will fall somewhere between 300 to 850, although most are in the 600s and 700s. A high credit score means you will likely have no trouble being approved for a mortgage and securing a low interest rate. A lower score, however, makes it harder to find a lender, and your interest rate may be higher if you do qualify.
Let’s say you are looking for a $200,000 fixed-rate mortgage with a 30-year term. Here’s an illustration of how your credit score may affect your interest rate and payment:
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