Your credit score plays a very important role in determining the mortgage rate a lender will offer you. The higher your credit score, the lower the interest rate you can qualify for, which translates into significant savings over the long run. With some time and focus, you can take steps to boost your credit score in the months leading up to applying for a mortgage. This will set you up for better mortgage rate offers and major savings over the many years you’ll be paying back your home loan.

The Strong Link Between Credit Scores and Mortgage Rates

Mortgage lenders view credit scores as one of the key factors indicating how likely a borrower is to repay their loan on time and in full. Default risk is a major concern for lenders. Assigning interest rates is one of the ways lenders offset and manage that risk. Applicants with higher credit scores have historically demonstrated responsibility with credit, and are rewarded with lower mortgage rates.

Someone with very good credit - a FICO score of 760 or above - may qualify for a 30-year fixed rate around 3.5% these days. However, a borrower with a lower score of 620 can expect rates of 5% or more. On a $250,000 mortgage, that’s a difference of over $136,000 paid in interest when you calculate it over the full 30-year term! Even just half a percent increase in rate can cost tens of thousands extra in interest. The savings available make boosting your credit score well worth the effort.

Specific Steps to Improve Your Credit Leading up to Your Mortgage Application

Here are some smart ways to improve your credit in the 6 to 12 months before you apply for a mortgage:‍

 - Pay all bills on time

- Payment history has a major impact on your scores. Delinquencies of 30 days or more can tank scores quickly. Set up autopay or reminders to avoid late payments.

- Lower credit utilization

- This means using less of your available credit. Keep card balances below 30% of the credit limit. Pay down balances aggressively.

- Hold off on new credit

- Too many new accounts in a short timeframe can hurt scores temporarily. Avoid applying for new credit.

- Correct errors on your credit report

- Dispute and fix any mistakes in your credit file to optimize your scores.

- Consider credit-builder loans or secured cards if needed

- These products allow you to add positive payment history and improve scores.

The Importance of Time and Patience

Improving your credit score takes diligence and patience. Payment history makes up a large chunk of your FICO algorithm, so scores climb slowly as positive history accumulates. Generally you need at least 6 months of disciplined credit management to move the needle in a meaningful way.

Be sure to start implementing credit-boosting strategies at least 6 months before you plan to apply for a mortgage to benefit from your improved score. Check your scores every month to monitor progress - just one month of slip-ups can affect your momentum.

Work With Your Lender for the Best Rate

Connecting with a lender early in the process is advised. They can provide a pre-qualification assessment to show mortgage rates you may currently qualify for. More importantly, they can offer targeted tips and advice on optimizing your credit based on your specific score goals and situation. As you get closer to the application date, ask for a Loan Estimate disclosure to compare total loan costs.

Conclusion

Improving your credit score takes effort, but pays dividends when you get approved for a lower rate. A little extra percent on a mortgage rate may seem insignificant, but translates into tens of thousands in interest savings over the life of your loan.