While there are many factors that impact your ability to qualify for a conventional mortgage, your FICO credit score not only makes a difference for an approval but also affects your mortgage rate. Lenders use risk-based pricing for conventional mortgage rates, which means the lowest mortgage rates are reserved for people with the highest credit scores. For example, on April 15, the MyFico.com calculator showed a 30-year fixed-rate mortgage for borrowers with a FICO score of 760 or higher averaged 3.8 percent, while borrowers with a credit score between 620 and 640 would pay 5.4 percent for the same loan. The monthly principal and interest payments for a $400,000 loan would jump from $1,864 to $2,246 with the lower credit score.
Improving your credit score takes time, but it can make a major difference in the affordability of a home. Rod Griffin, director of public education for the Experian credit bureau, suggested the following ways home buyers can improve their credit score:
- Bring any past-due accounts current, and make all future payments on time.
- Pay off any collections, charge-offs or public-record items such as tax liens and judgments.
- Reduce balances on revolving accounts.
- Apply for credit only when necessary.
There are also more-subtle ways to improve your credit score:
- Try a secured credit card. If you do not qualify for a traditional credit card account, consider applying for a secured credit card. With a secured card, you give the lender a deposit in exchange for use of a credit card account. As long the lender reports secured accounts to the credit reporting agencies and all payments are made on time and balances kept low, a secured credit card can help you build positive payment history.
- Get a co-signer or become an authorized user of a family member’s credit card. As a joint account holder, you are fully and equally responsible for payments on the account, so be aware that any late payments made on the account will affect you. As an authorized user, you will not be financially responsible for making payments. Not all lenders report authorized user accounts to the credit reporting companies, so check with the lender first to make sure the account will appear on your credit report once you are added.
- Get credit for on-time utility and cellphone payments. You can ask credit bureaus to include utility and phone payments in your credit file to improve your score. For example, the Experian Boost program allows you to connect your bank account to the credit bureau to automatically include those payments.