Credit Score Articles

Strong credit scores can get borrowers top mortgage rates

Conventional wisdom says that those with better credit scores get better rates on the loans they take out, and that is certainly true as mortgage rates plummet to year-to-date lows.

Rates for 30-year fixed-rate loans dropped to 5.03 percent two weeks ago, the lowest point since December, according to mortgage tracker HSH Associates.

And that number has dipped even lower in light of the drop in stock prices. Driven by more investors putting their money in treasury bonds, that mortgage rate dropped to just 4.84 percent.

This uncertainty in the stock market hasn't exactly sent lenders running for the hills, though. Even though spring and summer are historically the busiest for house hunting, and despite coming after the expiration of a federal home-buyer tax credit, they are still keeping their underwriting standards stringent.

However, consumers don't need a perfect credit score to qualify for one of these low-rate mortgages, just a good one.

While a potential borrower's credit score is and will continue to be the most important determining factor in loan eligibility, almost all mortgages are backed by either Freddie Mac or Fannie Mae. Both agencies require credit scores of 720 and above, Keith Gumbinger, vice president of HSH Associates, told Smart Money.

However, if a potential borrower's score is at or above 740, then they are likely to get the best rates available, "with as little as five percent down payment," Tim Galligan, a mortgage expert from Illinois, told the website. And they can get those loans without any risk premium adjustments the agencies added to most loans a few years ago. And for every 20 points below 740 the consumer's credit score drops, the risk premiums increase, he added, noting that they also increase with lower payments.

In general, down payments should be around 10 percent, but that number is typically higher where the housing market is worse, or if the buyer is purchasing a condo as opposed to a house.

Other factors that lenders consider when giving out loans are the amount of debt the borrower is carrying versus how much income they have and employment status. According to one expert, most lenders want the debt-to-income ratio no higher than 45 percent and for a borrower to have been employed, or at least making some kind of income, for at least two years.