While good credit is a requirement for most every mortgage loan, credit doesn’t necessarily have to be pristine. In fact, those with “perfect” credit who have a credit score approaching 850 are very, very hard to find. Credit scores will range from 300 to 850 and while all three major credit repositories of Equifax, Experian and TransUnion provide these scores to a mortgage company when borrowers submit a loan application, those three scores will be different but close to one another. A borrower might have a credit score of 720, 723 and 729 for example. The lender then ignores the lowest and the highest number and uses the middle one when evaluating a loan application. But how does a low credit score affect your mortgage loan?
That depends upon the type of loan program as well as the amount of initial down payment. Generally speaking, lenders can approve a conventional mortgage loan with a credit score of as low as 620 and with certain exceptions even a bit lower than that. However, with a credit score of 620 and a down payment of say 5.00%, the interest rate will be higher compared to the same loan with a credit score of 740 and a down payment of 5.00%. How much different? As much as a half percent higher. This will mean a higher monthly payment as well as lower the maximum amount you may borrow. However, if the borrower had a credit score of 620 and a larger down payment of say 30% down, the difference is something closer to 0.25% to 0.375% higher.
The government loan trio of VA, FHA and USDA also look to a credit score when assigning an interest rate yet many lenders require a lower credit score minimum of 600 instead of 620. The difference between someone getting an FHA loan with a credit score of 740 will be rewarded with an interest rate approximately 0.25% lower compared with a 600 score.
Lenders access a Loan Level Pricing Adjustment, or LLPA matrix when assigning an interest rate based upon a credit score and down payment amount. There are multiple combinations of score and down payment but all lenders refer to this chart when assigning interest rates to loan programs. These guidelines are assigned to government-backed loans used to purchase a home. When a government-backed loan is refinanced however and the borrowers use the popular “streamline” refinance option, credit scores don’t impact an approval as guidelines for these programs don’t require a credit check.
Finally, individual lenders can use their own internal guidelines as it relates to credit scores as long as the lenders don’t make the loan easier to qualify for. One lender can require a 620 score for instance and another a 640 under the very same circumstances. Credit scores do in fact impact a loan approval as well as an interest rate for a particular loan. Make sure you get all your options when speaking with your loan officer.