What credit score gets you the best mortgage rate

Thinking about refinancing a mortgage or getting a new mortgage? You need a credit score of over 800 to get the best mortgage rate possible. The reason why is the mortgage industry is now very tight. Mortgage rates are up. Fears of a recession are rising.

Your credit score is by far the most important determinant to getting the best mortgage rate possible followed by your debt-to-income ratio. To get the best mortgage rate possible, you need the highest credit score possible.

Let’s take a look at what the data shows. I’ll also share with you my latest mortgage refinance journey in 2019 to discuss how stringent the mortgage refinance process has become in 2020 and beyond.

To understand what credit score you need to get the best mortgage rate possible, you need to first see what the average credit score is for the market.

According to the latest quarterly report on household debt and credit by the New York Fed, 9 out of 10 U.S. mortgages go to borrowers with a score of 650 or better. Three quarters go to borrowers with scores of better than 700. Meanwhile, the average credit score for the 50th percentile is about 760.

Here is a graphical representation of the average credit score at origination.

In other words, the AVERAGE mortgage origination (50th percentile) has a credit score of 760. Therefore, you need to get a credit score higher than 760 to get the best mortgage rate possible.

In the past, people used to think having above a 720 credit score would lead to getting the best mortgage interest rate possible. A 720 is now only considered “good” according to FICO.

Today, in order to get the best mortgage rate possible, you need a credit score of above 800.

If you do end up qualifying for a mortgage with a less than a 800 credit score, your lender will likely be charging you 0.125% – 0.75% more than if you had had a 800+ credit score.

For example, given the 10-year bond yield is at about 1.5% as of 4Q2019, you can get a 30-year fixed mortgage for about 3.25% if you have a 800+ credit score.

If you credit score is between 740 – 799, your 30-year fixed mortgage rate will likely be 3.375% – 3.5%.

If your credit score is between 670 – 739, your 30-year fixed mortgage rate will likely be 3.5% – 3.75%.

With a credit score below 670, it is now likely you will not qualify for a loan. If you do, your mortgage rate will likely be 4% – 4.5%.

Mortgage Originations By Credit Score

Roughly 75% of all mortgages are given to borrowers with a credit score of 720+. Lenders are seriously focusing on only the highest quality borrowers unlike pre-2008, when banks would lend to anybody with a heartbeat.

Given the stringency of lending practices since the financial crisis, coupled with the rapid decline in mortgage interest rates, it is unlikely the U.S. will go through a downturn of the same magnitude as in the past.

You can get a government-backed loan by Fannie Mae and Freddie Mac if you have at least a 620 credit score. But you are going to be absolutely fleeced by the mortgage rate compared to what people with 800+ credit scores can get.

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Build Your Credit To At Least 760+ Before Buying Or Refinancing

Since 2012, the housing market has had a tremendous bull run. Some places like San Francisco, Seattle, Denver, and Washington D.C. have seen prices rise by over 80%. As a result,there should be no urgency to buy a home at near record-high prices without the best mortgage terms. Instead, I would work to improve your credit score to 760+ before applying for a mortgage.

As you can see from the chart below, the average US. FICO score hit a record high of 704 in 2018. It is probably a little bit higher in 2022. Given your competition has a higher credit score, you in turn, must also boost your credit score because banks have more to choose from. Banks can afford to be more picky now, and they should, to protect their business and the economy.

The five main components that determine your credit score are:

1. Payment History (35%)
2. Amounts Owed (30%)
3. Length Of Credit History (15%)
4. New Credit (10%)
5. Types Of Credit Used (10%).

The main way to improve your credit score is to always pay your debt on time for as long as possible. Do not try and game the FICO scoring system by trying to open up multiple credit cards and so forth. Keep things simple.

When it comes to taking on debt, stay disciplined.

Recommendations

1) Shop around for the latest mortgage rate. Check the latest mortgage rates online. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you’re getting the lowest rate for your situation. Further, you can make lenders compete for your business. 

2) Diversify into real estate crowdfunding. Plummeting interest rates should buoy demand for real estate. Check out Fundrise, my favorite real estate crowdfunding platform today. Instead of leveraging up to take a concentrated bet on one property, it’s a good idea to diversify your real estate holdings.

I especially like real estate in the heartland of America where valuations are cheaper and net rental yields are higher. I’ve personally invested $810,000 in real estate crowdfunding after selling one of my SF rental properties for 30X annual gross rent at a 2.5% cap rate. Now I can make money passively and am earning a ~12% IRR so far.

About the Author: Sam worked in investing banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.