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How lenders determine mortgage rates is similar to how you earned good grades back in school, or didn’t. Your teacher weighed many components, from test scores to research papers, to set the grade on your report card.
Lenders do the same thing when they set a mortgage interest rate. They look at a variety of things to decide whether they will trust you with their money. They also judge whether you are a good risk to pay the money back on time. But remember to shop around, because another lender could offer you a better mortgage rate. That better rate could save you thousands of dollars each year or over the life of the loan.
“Most of the credit decisions of approval are based on underwriting software,” says Ron Haddad. Haddad was then vice president of residential mortgage lending at Key Mortgage Services, Inc., in Chicago. “It’s all based on risk assessment. The higher the risk you are, the higher the interest rate.”
Check your home buying eligibility. Start here (Nov 7th, 2026)
What is a “risky borrower”?
A prospective lender may see you as a risky borrower. In that case, you will most likely see interest rates much higher than the advertised rates. Or you may have to put more in the down payment.
For instance, you can get the best interest rate if you meet the criteria on the underwriting software. That means you have a very high credit score, 780 or higher. Your credit history is pristine, with no late payments and no collections, and you haven’t used too much credit. Plus, you need the right income, a good down payment and the right type of home. All those details matter when lenders determine mortgage rates.
But Haddad says that after more than a decade in the lending business, nothing surprises him anymore. He has seen people with bankruptcies with 700 credit scores get good loans. And then he’s seen people with only a 640 credit score miss out on a good interest rate. Those borrowers had never made a late payment.
“A loan officer has to work with the credit report to determine more than what the credit score says. We can help people and work with the information we get in the report,” he says.
What kinds of property are considered “risky”?
Your credit report is only part of what sets your interest rate. The kind of home you are buying also matters.
“Condominiums carry a higher risk for lenders than a single-family home with a backyard,” Haddad says. “A $300,000 condo with 20 percent down will have a higher rate of interest than a single home for $300,000 with 20 percent down. There’s just an additional level of risk for condos. You might have to put 25 percent down on a condo to get the same rate you would for a single home.”
Lenders have been going by a risk-based pricing practice for a while. VantageScore Solutions, LLC, the company behind the VantageScore credit scoring model, explains what that means. Lenders offer better deals to people who pose much less risk of not paying back the loan.
How credit scores help lenders determine mortgage rates
The website states that lenders feel more comfortable giving out large amounts of money to those with high credit scores. That just makes sense.
Research by myFICO shows how borrowers with the highest scores manage credit. The site is part of FICO, an analytics software company. FICO developed the FICO Score. It uses credit report data from America’s three credit reporting companies: Equifax, Experian, and TransUnion.
According to myFICO’s 2019 data, these high-credit achievers use only 7 percent of their available revolving credit, on average. Revolving credit can include credit cards such as MasterCard or a retail store card such as Target. These are the people that get the really good interest rates.
But sometimes things happen, and you might land in the high-risk category of credit scores without even knowing it.
“It could be a $50 medical co-pay from five years ago that nobody reached out to you to pay, and it went into collections,” Haddad says. “It could be anything like that that could dump your credit score much lower.”
Medical bills are less likely to cause this problem today. Since 2023, the three nationwide credit bureaus have not reported paid medical collections or those under $500.
Haddad says to just be aware of your credit report. Check it every year to see that everything is correct.
A lender willing to dig deeper can make a difference
Sometimes a lender will go the extra mile to help you get a loan at a good rate. Miracles can happen. For instance, Haddad helped a guy secure a mortgage even though he had some dents in his financial background.
“He had nine jobs in the last two years and a bankruptcy four years ago. We were successful in getting him money from an Illinois Housing Development Authority down payment assistance program and a good interest rate on an FHA loan,” Haddad says.
The borrower had to write multiple letters to the lender. The letters explained the situation he was in and why he was in it. It worked.
“Sometimes, you just have to dig a little deeper and work a little harder to get someone a loan at a good interest rate,” he says.
Check your home buying eligibility. Start here (Nov 7th, 2026)
