After years of managing their money well, some people find themselves with credit scores of 800 or higher.
FICO scores range from 300-850 — so getting in the 800s can be a feat, and can often take a decade or more to reach. Fortunately, there are benefits to having a higher credit score.
For example, a high credit score could translate into large savings on a mortgage. Higher credit scores will often lead to lower monthly payments which could save you lots of money over the life of the mortgage. Plus, good credit will likely make the entire home buying process quicker and easier.
A high credit score makes you more attractive to lenders. Not only will you have an easier time getting approved for a loan, but you will likely have access to lower interest rates.
Plus, excellent credit gives you more negotiating power. You’ll have more room to negotiate closing costs and other fees associated with closing than a borrower with a lower credit score.
Even lower credit scores just below 800 can still help home buyers get more affordable housing.
Importance of Higher Credit Scores
While having a credit score of 800 seems lofty, even scores in the 700’s can help home buyers get lower mortgage rates.
Many loan programs have a minimum credit score requirement to get approved for a mortgage. For example, most lenders will require a credit score of 580 to get approved for an FHA loan. Other programs, like USDA mortgages and conventional loans, will require scores of at least 620.
Even though aspiring borrowers only need the minimum amount, a credit score that’s well above the minimum requirement can save you money and stress. Your credit history isn’t the only criteria that mortgage lenders consider when determining your interest rate, but it’s a big one.
Your mortgage rate will be determined by the size of your down payment, your debt-to-income ratio, current mortgage rates — and your credit score.
For example, a potential homeowner with a credit score of 760 who is planning on making a down payment of 20 percent will have a lower mortgage rate than someone with a score of 620 putting down 10 percent.
The size of the mortgage rate you can get depends on other factors as well, but keeping a high credit score is the best way to ensure buyer-friendly rates.
Small Credit Changes Matter For Your Interest Rate
Is having a credit score of 820 significantly better than having a score of 780 when it comes to how mortgage lenders look at someone? Not necessarily.
Because of how credit scores are grouped by lenders, some changes in credit aren’t going to affect your eligibility or rates. While a score of 820 is certainly better than 780, lenders will look at the two qualifying home buyers as credit equals because they fall in the same credit score range.
In many cases, the size of the down payment is the only thing that is going to determine a difference in available mortgage rates for home buyers with comparable creditworthiness.
However, keeping a high credit score is still important.
Each grouping of credit scores has specific mortgage rates assigned by different lenders. This means that you will be offered a lower mortgage rate if you are in a better credit score group. But this grouping method can frustrate some home buyers.
A credit score of 779 is going to be grouped differently than a credit score of 780. Even though they are just one point away, the credit score of 779 is going to be offered higher interest rates while the score of 780 will get the same mortgage rates as a score of 820 would.
This means that raising your credit score by one or two points can make a huge difference.
Preparing Your Credit Report
If you’re getting ready to apply for a home loan, you should request your credit report from the major credit bureaus. This will give you a chance to rectify any mistakes in your payment history.
While going through the home buying process, don’t make any big purchases or open new credit cards. This can also be a good time to increase your available credit (either by paying off debt or increasing your credit limit) to improve your credit utilization ratio. Be sure to communicate with your lender on how to improve your credit score.
Every little change can matter to your mortgage application. Excellent credit can mean a lower interest rate, which can save you thousands of dollars over the life of your mortgage loan.