Credit Score Impact Pt.2

Here’s part 2 of my three part reference guide to credit scores in home financing.

________________________________________________________________________________________________

Impact on Interest Rates:

General Rule: Higher scores = lower rates; lower scores = higher rates.
Example (Conventional 30-Year Fixed, March 2025 Rates):
- 760+: 6.0% APR
- 700–759: 6.2% APR
- 620–699: 6.8% APR
- Below 620: Often ineligible or 7%+ with added fees.
Cost Difference: On a $300,000 loan, a 1% rate increase adds ~$200/month or $72,000 over 30 years.
Institutions: Online lenders and credit unions may offer better rates for high scores; brokers can shop for deals across score ranges.
Impact on Down Payment
- Higher Scores: Lenders may accept smaller down payments (e.g., 3% for conventional loans with 720+).
- Lower Scores: Require larger down payments (e.g., 10% for FHA with 500–579) or PMI, increasing upfront and ongoing costs.
- Exceptions: VA/USDA loans (0% down) are less score-dependent but still favor higher scores for approval.
Impact on Loan Approval Process
- High Scores (700+): Faster approvals, fewer conditions, less documentation scrutiny.
- Moderate Scores (620–699): Approvable but may need extra proof of income, debt explanations, or reserves.
- Low Scores (<620): Manual underwriting (if allowed) or rejection; alternative options like FHA or seller financing become critical.
Impact by Institution
1. Commercial Banks: Strictest standards; favor 700+ for best terms.
2. Credit Unions: More lenient for members; may work with 600+ scores.
3. Mortgage Lenders/Brokers: Vary widely; some specialize in subprime (below 620) loans with higher rates.
4. Online Lenders: Often prioritize scores but use algorithms to approve 620+ quickly.
5. Community Banks: Flexible for local clients; may overlook moderate scores with strong ties.