5 Ways Your Credit Rating Affects your Mortgage
3 minute read
February 27, 2014


credit rating Everyone knows that when they are applying for a mortgage their credit will be assessed. However, do people really understand the many implications of their credit rating and how it affects their mortgage? Here are 5 ways your mortgage is affected by your credit rating:

1- Loan Approval

First and foremost, most lenders have a minimum credit requirement in order to grant a loan. Lenders are looking at your credit score, length and diversification of credit, payment history and amount of credit utilized while determining whether or not to grant approval on a loan application. If your credit score doesn’t meet the minimum requirements your loan application could be automatically denied based on that factor.

2- Interest Rate

Most lenders use risk based lending. Risk based lending means that they issue the same loan product at different interest rates depending on the credit rating of each borrower. The lower your credit rating is, the higher a risk the lender is taking and the higher your interest rate will be. While the change in percentage of the interest rate may not seem like much, it can add up to hundreds of dollars per month and thousands of dollars over the life of the loan.

3- Down Payment Amount

Depending on a borrower’s credit score, a lender may require a larger down payment in order to issue the loan. Loans that are issued to borrowers with lower credit scores are considered riskier. In an effort to protect themselves against default a lender may require that a borrower make a larger down payment to assure a greater amount of equity in the home.

4- PMI Approval

If a borrower does not make a downpayment of 20% there is typically private mortgage insurance (PMI) associated with the loan. Private mortgage insurance companies will look at a borrowers credit score to approve the borrower for the insurance and determine how much the PMI will cost the borrower. The lower the credit score, the higher the payment for private mortgage insurance.

5- Homeowner’s Insurance

Even insurance companies are looking at a borrowers credit rating when determining insurance premiums. Research has found that homeowners with lower credit scores have a higher instance of claims. Therefore, insurance companies typically offer high premiums to borrowers who have lower credit ratings.

Your credit rating greatly affects the mortgage process from initial approval to your monthly payment. Be diligent about handling your credit obligations to assure that you get the mortgage products you are looking for at the best cost. Having a strong credit rating will lower the interest and insurance premiums you pay and allow you to allocate your hard earned money towards the house of your dreams.

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