February 25, 2019
How Does Your Credit Score Affect Your Mortgage Rate?
Much of a lender’s business is based on assessments and assumptions of risk. In order for a lender to be willing to grant a loan to someone with a low credit score—which the market takes to mean that there have been delinquent payments or other outstanding, unpaid loans in the past, or some other financial insecurity or irresponsibility that indicates a higher chance of default on loan payments—that lender wants to increase the amount of money it will have already received in the case of default.
While it may appear to borrowers that it doesn’t make sense for a lender to charge someone more in interest when their credit is less than optimal, it is precisely this assessment of risk and assertion of necessity of higher payment amounts on a monthly basis that makes the mortgage industry possible at all. Otherwise lenders would almost certainly go out of business for lack of funds and liquidity; or they would never grant loans except where repayment was a practical certainty, which would severely limit the number of homeowners in America.
A reasonably high credit score—in the 700s at least—shows lenders that you have been conscientious about paying debts you owe, and that makes them more likely to believe that you will continue to behave in the same way—all but ensuring that they will eventually earn back the total amount of the money they loaned, plus interest, without having to put in any money or investment of man-hours in the meantime to re-sell the home or process it through foreclosure. This in turn means they can take the risk of granting you a lower mortgage rate.
It may not feel fair to someone who has not maintained their credit score—or who has not yet taken on the debt to build a credit score in the first place—but it is nonetheless one of the major means by which lenders attempt to ameliorate the risks inherent in lending such large sums of money to the public. And since that means many Americans are able to afford homes of their own—in the big picture, it’s worth it.
Here at Topouzis & Associates, P.C., we do extensive title search work, no matter what the borrower’s credit score may be. Contact us if you have any questions or if you would like our considerable experience in dealing with the particularities the real estate system.