How Does My Credit Score Affect My FHA Mortgage Rate?

The 2024 FHA Loan Handbook

Does my credit score affect the FHA mortgage rate I receive from a lender? And if so, how? What can I do if it’s low?

These are common questions among home buyers considering the FHA mortgage program. And rightfully so. The interest rate you receive can add up to a significant amount of money over time. Today, we will examine how your credit score can affect your FHA mortgage rate.

The short answer is yes. Your credit score can definitely influence the interest rate you receive on an FHA-insured home loan. The same is true for all types of mortgages, actually. Credit scores are part of the pricing protocol for FHA, conventional and VA home loans. (But here, we will focus on the Federal Housing Administration mortgage program in particular.)

How Your Credit Score Affects Your FHA Mortgage Rate

Let’s start with the basics.

Your credit score is a three-digit number that is computed based on information found within your credit reports. You probably have three different scores, instead of just one. You might have one for each of the three credit-reporting agencies in the U.S. — TransUnion, Experian and Equifax.

Credit scores matter to mortgage shoppers because they can affect the interest rate you receive from a lender.

  • Borrowers with higher numbers tend to qualify for better / lower mortgage rates on their loans.
  • While those at the lower end of the scoring spectrum tend to get higher rates (and pay more over the long term as a result).

The next logical question is why. Why do FHA mortgage lenders care so much about credit scores? The answer has to do with risk.

Why They Matter to Lenders

Mortgage pricing is heavily influenced by risk. Generally speaking, a person who is considered to be a higher risk to the lender will be charged a higher mortgage rate than a less risky borrower. And the credit score is one way FHA mortgage lenders measure risk, on an individual basis.

If you have a relatively high score, it shows that you have borrowed and repaid money reliably over the years. Consumers with higher scores tend to have a “cleaner” credit history with fewer late payments, delinquencies, and the like.

On the other hand, consumers with lower scores tend to end up in that situation by having a history of missed payments on car loans, credit cards, etc. These borrowers are therefore considered to be a higher risk, when it comes to mortgage approval, underwriting and pricing.

Now you’re starting to see how and why your credit score can affect your FHA mortgage rate. If it’s lower than average, you’ll probably end up with an interest rate that’s higher than average. But if you have a relatively high score, you might qualify for the lender’s best rates.

This also underscores the importance of checking your credit scores before you apply for an FHA home loan. While that’s not required, it can help you figure out where you stand in terms of your qualifications.

Other Factors That Can Affect Mortgage Pricing

It’s important to understand that the credit score is just one of several factors that can affect your FHA mortgage rate. Granted, it’s one of the most important factors — at least from the lender’s perspective. But there are other important considerations as well.

For instance, the amount of money you put down can also influence the rate you receive from a lender. Here again, it all comes to risk. Borrowers who make larger down payments are less of a risk to the lender. A smaller down payment requires the lender to make a bigger investment, and to take on the majority of the risk.

The length of the term also plays a role here. If you do a Google search for “Freddie Mac mortgage rates,” you will see the current average rates across several different types of loans (15-year fixed, 30-year fixed, etc.).

This will show you how different types of loans have different average rates associated with them. For instance, a 15-year fixed mortgage usually offers a lower interest rate than the more popular 30-year fixed.

How to Get the Best Rate Possible

To recap, your credit score affects your FHA mortgage rate by serving as a risk-assessment tool for the mortgage lender. Higher scores can help borrowers qualify for lower rates, while the opposite tends to be true as well.

Generally speaking, borrowers with credit scores between 760 and 850 qualify for the best mortgage rates available at a particular time. That’s based on the FICO scoring range, which goes from 300 to 850.

But even if you fall short of that ideal range, there are certain things you can do to get the best possible rate on your FHA loan.

1. Consider using discount points.

Some borrowers who use the FHA loan program choose to pay discount points in exchange for a lower mortgage rate. The idea here is that you pay a certain amount of money up front (usually at closing) in exchange for a lower interest rate.

If you keep your FHA loan for many years, this financing strategy could work to your advantage. The amount you save by receiving a lower rate will eventually begin to exceed the amount paid in discount points. The savings can add up over time.

2. Consider the term or length.

Along with your credit score, the length or “term” of your loan can also affect your FHA mortgage rate. We talked about this above.

If you chose a 15-year fixed loan, you would most likely qualify for a lower rate than if you used a 30-year mortgage option. Granted, your monthly payments will be higher, since you’re compressing the repayment into a smaller period of time. But you also pay a lot less interest over the life of the loan, compared to what you might pay on a 30-year FHA loan.

3. Try to improve your score.

This article paints a clear picture of how your credit score affects your FHA mortgage rate. Having a higher score makes you less of a risk and helps you qualify for better deals.

So, if you’re currently at the lower end of the spectrum, you might want to take some proactive steps to improve your credit situation.

There are some well-documented steps you can take to boost your score. It takes time, but it might be worth the effort if you’re planning to apply for an FHA mortgage loan.

The best way to improve your scores is to focus on the factors that matter most. Above all, make sure you pay all of your bills on time, going forward. Late payments and missed payments can wreak havoc on your credit score.

4. Shop around and get multiple quotes.

Your credit score will certainly affect the FHA mortgage rate you receive from lenders. But different lenders might interpret your qualifications in different ways.

They don’t offer the same pricing across the board. There is no industry-wide standard. Different banks and mortgage companies have different comfort levels, when it comes to risk. They have different approval and underwriting procedures.

In short, they are different businesses with different practices.

So it’s possible to be offered different mortgage rates from different FHA lenders, even though they are looking at the same credit scores. This is why it’s so important to shop around and get multiple offers.

You don’t have to shop around, and a lot home buyers and borrowers skip this step entirely. But you could benefit from it.

A Review of Key Points

We’ve covered a lot of information in this article, because it’s a very important topic from a home buyer’s perspective. Here’s a summary key points covered in this lesson.

  • Your credit score affects the interest rate you receive on an FHA loan.
  • Generally speaking, a higher score will help you qualify for the program and could get you a lower rate.
  • On the other hand, having a lower number could mean that you’ll end up paying more for a loan — or possibly being rejected.
  • Credit scores are essentially a risk-analysis tool. Banks and mortgage lenders tend to charge more for riskier borrowers.
  • There are other factors that can affect your interest rate as well. Discount points, the loan term or length, and other factors play a role.
  • You can improve your chance of getting the best possible rate by gathering offers from multiple lenders.

Disclaimer: This article explains how your credit score can affect your FHA mortgage rate, based on historical trends and common industry practices. Every mortgage lending scenario is different, because every borrower is different. Lenders approve loans and set their pricing based on a variety of factors. As a result, portions of this article might not apply to your particular situation.