Mortgages: Credit Scores, Interest Rates, and More

Mortgage lenders generally say that an affordable home is one that costs no more than three to five times your annual household income. A 20% down payment is traditional, but special loans or grants may be available to help with that payment, particularly for first-time homebuyers. You also need to be prepared to pay for maintenance, insurance, and potential property tax increases down the road. A good suggestion is to make sure you don’t spend more than 28% of your gross income on housing costs in any given month.

Pretty much anybody can get “pre-qualified” for a mortgage. However, sellers are usually looking for a buyer who is “pre-approved,” meaning a lender has reviewed all of your financial information, and they’ve advised you how much of a house you can afford and how much money they will lend you. Being pre-approved enables you to shop around for the best deal and the best interest rates.

You may want to check your credit score before starting the mortgage pre-approval process, as it can affect the interest rate you’ll be offered. This list represents a general rule of thumb about the impact of your credit score:

• Excellent (760-850) – Your credit score will have no impact on your interest rate. You will likely be offered the lowest interest rate available.
• Very Good (700-760) – Your credit score may have little to no impact on your interest rate. You will likely be offered .1-.25% higher interest rates from the lowest available.
• Good (660-699) – Your credit score will have a minimal to small impact on your interest rate. You will be offered .5% higher interest rates from the lowest available.
• Moderate (620-660) – Your credit score will really begin to affect your interest rate. You will be offered 1-1.5% higher than the lowest available.
• Poor (580-620) – Your credit score will really affect your interest rate. You will be offered 3-5% higher than the lowest available.
• Very Poor (500-580) – Your credit score will severely affect your interest rate. You will be offered very high rates that ultimately will depend on the circumstances.