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It’s no secret that home buyers need a good credit score to qualify for a mortgage. But is “good” credit good enough, or is “excellent” credit required?
The answer is that excellent credit isn’t required but may help you qualify for a slightly lower mortgage rate. That lower rate could add up to real savings over the lifetime of the loan. But again, with emphasis, “excellent” credit isn’t required to be approved.
Dig deeper: Is 2024 a good time to buy a house?
Half of consumers have ‘good’ credit
In 2023, only 21% of consumers had an “exceptional” score (800 to 850), while 28% had a “very good” score (740 to 799), and 22% had a “good” score (670 to 739), according to the Experian credit bureau.
Collectively, 50% of consumers had “very good” or “good” credit scores while less than half as many had “exceptional” credit scores. If lenders limited their mortgage loan approvals to consumers with “exceptional” scores, they’d have far fewer customers than they can approving loans with more flexible guidelines.
Learn more: Best mortgage lenders for bad credit
How your credit score affects your mortgage rate
Now, suppose you want to buy a home and your credit is “good” or “very good,” but not “exceptional.” How much difference will that make in the mortgage rate and terms you’ll be offered?
The short answer is that it will make more of a difference long term as opposed to month to month.
Loan-level pricing adjustments
To understand why, you need to know that while mortgage lenders independently set their own rates, Fannie Mae, for example, gives lenders specific guidelines that show rate adjustments for different types of conventional loans and different lending situations.
Among these guidelines are rate adjustments based on your down payment and credit score. As your down payment shrinks, your credit score becomes an increasingly important factor in the rates you’ll be offered.
With an “exceptional” credit score, for example, you might be offered a rate as low as, say, 6.125% for a 30-year fixed-rate conventional mortgage to buy a $450,000 home with a 10% down payment. With a “very good” or “good” credit score and all else being the same, your best rate offer might be 6.25%, 6.375%, or 6.5%.
Learn more: Will applying for a new credit card hurt my mortgage application?
The dollar difference
With the “exceptional” credit rate of 6.125%, your monthly principal and interest payment would be $2,609, and the total interest expense would be $120,097 for the first five years of your loan term.
With the “good” credit rate of 6.5%, your monthly principal and interest payment would be $2,708, and the total interest expense would be $127,717 over the five-year period.
The dollar difference comes out to $7,620 in interest over the five-year period, and just under $100 each month.
Credit score impacts mortgage insurance, too
Your credit score can also affect how much you may have to pay for private mortgage insurance as part of your monthly payment if your down payment is less than 20% of the home’s value. A higher credit score could result in a lower cost for PMI with the same down payment and loan type.
Learn more: What is mortgage insurance, and how much does it cost?
Other factors that affect your mortgage rate
Your credit score is only one of a number of factors in whether you’ll be approved for a mortgage and if so, what rate and other terms you’ll be offered.
Other factors may include:
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The state where the home you want to buy is located
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The home’s sale price
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Your down payment and loan amount
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Your loan term (e.g. 30 years or 15 years)
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Your rate type (e.g. fixed, hybrid, or adjustable)
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The type of mortgage loan you want
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Your credit history with the lender
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Your income, assets, and savings
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Your total monthly debt payments relative to your monthly income (aka your debt-to-income ratio, or DTI)
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Whether you choose to pay discount points to lower your rate
The bottom line is that you can get a mortgage and buy a home without having an “exceptional” credit score. Though you may be offered a lower rate with an “exceptional” score, it’s not required to be approved.