FICO Scores and Interest Rates

August 9, 2020

FHA home loan interest rates remain below the three percent range at press time; actions by the Fed combined with investor reaction to those actions have helped keep rates low. The Fed does not directly set or adjust mortgage loan interest rates but their policies affect markets that do influence home loan rates.

Some borrowers see all-time loan interest rate headlines and want to know how they can access such low rates. What do you need to know about home loan interest rates? To start, you should be aware that your credit scores influence the rate you may be offered by a participating FHA lender.

That is why you read a lot of advice on line about preparing your credit ahead of a mortgage loan application. Are you interested in buying or building a home? What about refinancing it? In either case, it’s best to start working on your credit at least 12 months ahead of your mortgage loan application.

Your credit score influences the interest rate your lender will offer you and the better your score, the better your chances are at getting a more affordable loan. But the scores only tell one part of the story and your payment habits are also scrutinized.

That’s why you’ll want to make sure you have 12 months or better of on-time payments on all financial obligations.

At this stage there are some borrowers who feel it necessary to consider debt consolidation loans to get their payments under control but it is crucial to remember that any new credit line ahead of your home loan is discouraged and a hard inquiry into your credit through such a loan can negatively affect your FICO scores.

Avoid applying for new credit once you have committed to buying a home.

When your credit scores begin to improve after a consistent effort to pay on time, lower your credit card balances, and reduce your overall debt, you’ll want to continue monitoring your credit--ongoing credit monitoring will help you avoid nasty surprises at home loan application time.

Remember that your credit report is a living document; having no evidence of identity theft today is not a guarantee that you’ll continue to avoid being targeted in the future.

The home loan interest rates you see listed online are not the scores offered to every single applicant; your credit will affect the number your lender quotes you. There are lenders who may offer more competitive rates and it is best to shop around for a mortgage loan to find the most competitive offerings. Don’t assume that all lenders will treat your application data the same. Your experience may vary greatly depending on how many lenders you talk to.

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