Credit Score and Mortgage Pricing: What Moves the Needle

Your credit score doesn’t move your mortgage cost a little at a time. It moves in steps. Lenders group scores into bands, and when your score crosses a line, the price or the down payment changes. That’s why two points can cost you real money.

I see buyers wait months for a better score, and I see others wreck a good score the week before closing. Here’s what actually moves the needle, and what to leave alone while you’re shopping.

How do credit score bands affect a mortgage?

Pricing and program rules are set at score ranges, not for every individual point. Fannie Mae’s loan guidance refers to loan-level price adjustments, which are pricing changes based on factors like credit score and loan-to-value. Different loan types have different cutoffs, so there’s no single magic number.

The part most borrowers miss is that the cutoffs differ between programs. A score that’s fine on one program can be a step short on another.

The edge: a two-point gap can change your down payment

Here’s an example from the kind of grid I see in the bank statement programs I work with. These are sample figures in a solid market, they change with investor appetite, and every lender is different, so treat this as an illustration and not a quote.

• A 700 score may allow 90% loan-to-value, which is 10% down.
• A 660 score may allow 85%, which is 15% down.
• A 640 score may allow 80%, which is 20% down.

Take a hypothetical $800,000 home. At 10% down that’s $80,000. At 15% it’s $120,000. At 20% it’s $160,000. Between a 700 and a 660 on that grid, the gap is $40,000 of cash. If you’re at 698, find out what two points would cost you before you give up on a purchase, and ask what you can do to cross the line honestly.

That’s also why I tell borrowers to check their credit early. Most programs that use these bands are non-QM (non-traditional) loans. A Qualified Mortgage, or QM, is the CFPB’s category for a loan with safer features. A non-QM (non-traditional) loan sits outside that box but still has to meet the federal ability-to-repay rule. Because the lender takes on more risk, in my experience the rate typically runs about 1% to 2% higher than a traditional loan, and it varies by file and market. A tax-return loan on a conventional program may price very differently.

Which of my credit scores do lenders use?

Lenders pull scores from the three credit bureaus, and in my experience they typically use the middle score, not the highest. I’d confirm that for your loan type. If you’re buying with a spouse, both scores matter, and the lower one can drive the pricing.

What should I avoid while I’m shopping?

Keep your credit boring until you close. In my experience these cause the most problems:

• Opening new credit. A new car loan or store card changes your score and your debt-to-income ratio, and lenders re-check before closing.
• Closing old accounts. It can shorten your history and lower your available credit.
• Running up card balances. Balances relative to your limits are a big part of your score.
• Missing a payment. A late payment on your housing or a credit account can cost you far more than a rate change.
• Co-signing for someone. That debt can count against you.

Do multiple mortgage inquiries hurt my score?

Shopping for a mortgage is normal, and scoring models generally treat several mortgage inquiries in a short window as one. I’m not certain of the exact window for every scoring model, so ask your loan officer how it applies to your file. The bigger risk is opening new credit while you shop.

A pitfall I see: the thin credit file

This is a hypothetical, but it’s a pattern I see a lot. A business owner has a 740 score but only a couple of active accounts. The score looks great, but the program wants a minimum number of open tradelines with recent activity. In my experience a common standard is three open accounts for 12 months or two for 24. The file stalls late because nobody checked the history, not the score. Ask about tradeline requirements early.

Before you apply

1. Pull your reports from all three bureaus and dispute errors.
2. Find out your scores, and ask which band you’re in.
3. Don’t open or close accounts in the next few months.
4. Pay cards down if balances are high, but keep your cash for closing.
5. Count your open accounts and how long they’ve been active.
6. Ask me where the cutoffs are, so we know what two points could mean.

For first-time buyers, see First-Time Buyer Myths That Cost Real Money, and for the full picture of qualifying, my conventional loan page.

I’m a mortgage broker with NEXA Lending, and I work with borrowers in all nine states where I’m licensed (CA, CO, TX, FL, GA, NC, SC, TN, VA). As a broker, I can shop your loan across a wide network of lenders instead of being stuck with one bank’s programs. Programs, rates and approval depend on your full file, and individual rates vary.

Sources: Fannie Mae, 97% LTV Options FAQ (loan-level price adjustments) (opens in a new tab), CFPB, What Is a Qualified Mortgage (opens in a new tab). Program grids described here reflect my own experience and change with the market.