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How Much Good Does Good Credit Do?

The best way for home buyers to fight back against rising mortgage rates is to maintain the best possible credit score and credit history. Lenders offer lower mortgage rates to borrowers with higher scores because they are a lower risk. Good credit can lower your rate by a full percentage point or more and reduce your monthly mortgage payment by hundreds of dollars.

Buyers who heed this advice spend many months making sure they pay every bill on time, avoiding large balances on revolving credit accounts and maintaining credit card accounts for many years. They monitor their credit on sites like Credit Karma or Wallet to see how they are doing and to correct any reporting problems quickly.

These days lenders are hungry for business with home buyers as opposed to owners who are refinancing, and there’s some evidence that they are even sweetening the pot for home buyers by offering then better rates than normal.

Fight High Rates with Good Scores

FICO, the leading credit scorer, assesses risk for each borrower and assigns a score ranging from 300 (bad) to 850 (good). High scores predict the minimal risk of default; low scores, substantial risk.

According to FICO, a high credit score is vital for a better rate quote from a lender. The FICO site features a widely used table showing how credit score affect mortgage rates (below).

via MyFICO

Note that increases in scores do not create a proportional decrease in interest rates, especially for midrange scores between 640 and 680. This phenomenon is easy to see in LendingTree’s analysis of mortgages during January.

LendingTree is an online mortgage platform where buyers can receive competing offers from many lenders based on credit profiles, income, down payment, debt, credit score and other factors. More than 500 mortgage lenders participate, LendingTree accounts for over one-third of all mortgages originated online.

Deviations in Mortgage Rates and Credit Scores

Every month, LendingTree charts mortgage rates by FICO scores range on loan offers from lenders on its platform. One would expect that the relationship between credit scores and mortgage rates would be distributed equally no matter what the FICO score range. However, the FICO score data tell a different story. FICO scores at the top and the bottom of the spectrum change interest rates faster than scores in the middle. Take a look at the chart below based on LendingTree data in January 2019.

Borrowers with scores in the range of 720 to 759 are getting rates that are nearly as attractive as those with scores over 760, and borrowers at the lowest end of the scale with scores in the 620 to 639 range are getting rates just above those with scores between 640 and 679.

via LendingTree

Syndicated real estate columnist Ken Harney noticed this unexpected trend and asked LendingTree to review for him more than 1 million mortgage offers during 2018. They found that a “good” 700 FICO score gets nearly as attractive a rate deal as someone with an 800-plus score.

Competition Impacts Mortgage Rates

Lending Tree’s chief economist, Tendayi Kapfidze, told Harney that this trend was likely the result of a challenging market for lenders in 2018 as demand for refinancings withered and home purchase applications became a prime focus. “More intensive competition” for that business opened the doors for lower rate quotes to borrowers whose credit profiles would normally have been charged more, he told Harney. Harney found similar signs that lenders are willing to take on slightly more risk with lower-scoring borrowers these days in data tracking median FICO scores for FHA borrowers.

“Bottom line here: Your FICO score is not necessarily your mortgage destiny. Shop the market aggressively, and you’re likely to find a wider range of rates available to you than you imagined,” Harney wrote.

It’s probably no surprise that the mortgage interest rates borrowers receive reflect market trends. Not so long ago, when rates were falling, lenders competed more aggressively for refinancing mortgages than for purchase mortgages. Perhaps at that time, the same skewing that we see today in purchase mortgages was taking place in the refinance market.

Borrowers should shop around, as Harney advises, to see if they can get a better rate since lenders are hungry for their business. They might also work just a little harder to improve their scores, knowing that adding just a few more points to their FICO scores might be enough to get an even better rate.

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Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

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