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The next time you check your credit score, you may be pleasantly surprised. That’s because the average FICO® Score hit a record high of 710 during the pandemic. That’s according to a report from Experian® analyzing scores in the third quarter of 2020. It represented a 7-point gain over 2019’s average and 21 points over 2010. Researchers believe stimulus checks and boosted unemployment benefits likely helped consumers pay off debt, while staying at home cut spending. Additionally, CARES Act forbearance plans contributed to millions of consumers’ accounts being reported as “current” rather than delinquent. If your score jumped, you may be able to leverage these potential benefits of good credit when buying or refinancing a house.
1. Lower mortgage rates
It’s no secret that good credit can help you secure a competitive mortgage. Depending on your score, even a few points’ boost could move you into a stronger credit rating category with more mortgage benefits. MyFICO lists categories as the following, but lenders’ internal standards vary:
|Rating||Credit Score Range||Description|
|Poor||Less than 580||Borrowers in this range generally receive the highest interest rates, and it can be difficult to qualify for a loan.|
|Fair||580–669||This range is considered below average, but many lenders offer loans to borrowers in this category.|
|Good||670–739||These scores are “near or slightly above” average for U.S. consumers, according to myFICO.|
|Very Good||740–799||Borrowers with these scores and above generally get the lowest interest rates.|
|Exceptional||800||This range is considered “well above average.”|
Overall, good credit when buying or refinancing a home could save a borrower more than 1% on a loan. According to CNBC Select, that could translate to saving at least $200 per month on a $300,000 house with a 30-year mortgage or $72,000 over the life the loan.
2. More mortgage options
Borrowers typically need to meet a minimum credit score when they apply for mortgages and these scores vary by loan type and lender. Conventional loans (mortgages backed by Fannie Mae and Freddie Mac) are most common in the U.S. and require a minimum credit score of 620. In comparison, FHA loans may allow a score as low as 500, and VA and USDA minimums are set by lenders. Note: Cash-out refinances usually require higher scores.
Each loan has pros and cons. FHA loans, for example, are known for low down payments and relaxed loan approval standards, but they tend to have higher mortgage costs altogether compared to alternatives. Having options can help you settle on a loan that suits you best.
3. Bigger loan amount
Good credit can also help you qualify for a larger loan which could come in handy because the average home price has also reached record highs in the pandemic. As of February, the median existing home price was $313,000, according to the National Association of Realtors®, which is up 15.8% over 2020. The median new home price was $349,400, according to the National Association of Homebuilders.
4. Improved chance of approval
Credit scores gauge risk. Given that, a fourth potential benefit of good credit is a smoother approval process when you’re buying a house or refinancing. Credit scores aren’t the only thing lenders will consider, however. Additional factors such as your monthly income and debt-to-income ratio, as well as a home’s cost and location, usually come into play.
5. Less expensive homeowners insurance
Insurers often check credit-based insurance scores when reviewing applications and pricing policies (in states where the practice is allowed). These scores aren’t the same as the FICO® credit scores a lender might consult when you apply for financing. However, they’re often based on similar information such as payment history.
6. Lower private mortgage insurance costs
Credit scores can also affect the added expense of private mortgage insurance (PMI). Homebuyers typically have to pay it if they don’t put at least 20% down on a home. The same goes for homeowners if they don’t have 20% home equity when refinancing. PMI can be as little as .20% of a mortgage balance all the way up to 1.75%, and your credit score can play into your final cost along with your mortgage’s loan-to-value ratio (LTV)—which reflects how much equity a buyer has in a home—and loan term. For example, a homebuyer who puts 15% down (or has 15% equity) on a $300,000 mortgage might pay $42.50 per month in PMI if their FICO Score is 740 compared to $102 per month with a score of 620.
Bonus for buyers: Lower (or no) security deposits for utility setup
As you buy a home, good credit could eliminate security deposits on the utilities you need. You may net hundreds of dollars in savings as a result when you turn on essentials such as water, electricity, or gas.
For more information on home loan options based on your improved credit, or to apply for a mortgage today, visit www.mrcooper.com/refinance.
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