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Credit Scores and Mortgage Interest Rates

A high credit score is a key element in securing a low mortgage interest rate and favorable loan terms. Think of it like a teeter-totter: As your credit score goes up, your interest rate goes down. If credit scores goes down below a certain point, mortgage rates on the other end of the teeter-totter will go up.

Of course, credit scores aren’t the only factor in whether or not you qualify for a mortgage and the interest rate you may pay.  Other factors include:

• Your loan-to-value ratio (the total amount of a mortgage divided by the appraised value of the property).
• Your total assets and how much money you owe.
• Your income.
• The size of the mortgage loan (Interest rates are automatically higher on “jumbo” loans of more than $417,000).

Why are credit scores important?
Mortgage lenders do some calculations to try to assess how much risk they are taking on in approving your mortgage loan. If you have a history of paying bills on time and not taking on too much debt relative to your income, the bank is more likely to be comfortable about lending you money. Your reward for good credit management: you may enjoy lower mortgage rates (all other things being equal).

Conversely, red flags are raised if your credit score indicates even occasional problems with missed payments or other credit challenges. If you otherwise qualify for a mortgage, you might have to pay a higher mortgage rate to reflect what the bank considers to be a higher risk level.

Credit scores and interest rates
FICO scores (the official name of the credit score issued by Fair Isaac) range between 300 and 850. The median credit score as of late March 2009 was 723.

Most mortgage lenders require a score of at least 680, but there are exceptions. According to Fair Isaac, the minimum score needed to obtain the very best interest rates is 760. The next tier is 700 to 759, which may also results in excellent interest rates.  Below 700, mortgage rates generally increase for every 20-point FICO score drop.

It should be noted that factors other than credit score can also affect the mortgage interest rate your are offered.  So having an excellent credit score does not necessarily guarnatee that you will receive the absolute best rate.

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