Mortgage interest rates based on credit score



Credit scoreAre you aware that your credit score can determine your mortgage interest rate? It’s true, lenders adjust the interest rate on your mortgage based on your credit score and your down payment (or equity with a refinance). The term for the interest rate adjustment is called "loan level price adjustment", LLPA for short. The following chart illustrates the interest rate adjustment for a conventional loan. The credit score range can be found on the left side of the table. Along the top is the down payment or equity in the home for a refinance.

Credit Score Down payment or equity percentage
  40% or more 30% to 39% 25% to 29% 20% to 24% 15% to 23% 10% to 14% 5% to 9% 3% to 4%
>=740 0.00% 0.25% 0.25% 0.50% 0.25% 0.25% 0.25% 0.75%
720 - 739 0.00% 0.25% 0.50% 0.75% 0.50% 0.50% 0.50% 1.00%
700 - 719 0.00% 0.50% 1.00% 1.25% 1.00% 1.00% 1.00% 1.50%
680 - 699 0.00% 0.50% 1.25% 1.75% 1.50% 1.25% 1.25% 1.50%
660 - 679 0.00% 1.00% 2.25% 2.75% 2.75% 2.25% 2.25% 2.25%
640 - 659 0.50% 1.25% 2.75% 3.00% 3.25% 2.75% 2.75% 2.75%
620 - 639 0.50% 1.50% 3.00% 3.00% 3.25% 3.25% 3.25% 3.50%
<620 0.50% 1.50% 3.00% 3.00% 3.25% 3.25% 3.25% 3.75%

Here's how the loan level price adjustment works. Let's say you're purchasing a $200,000 home with a 20% down payment. That means your loan amount will be $160,000, and your credit score is 740. The credit score of 740 with a 20% down payment earns a .5% price adjustment. The .5% will increase the closing costs by $800 ($160,000 X .005 = $800). Ouch! If the rate adjustment is too much for your budget, the lender could offer you a higher interest rate (about 1/8%) in lieu of the increased closing cost.

Look at the cost adjustment with a 620 credit score . . . $160,000 X .030% = $4,800, or a 1/2 percent interest rate increase.

The mortgage interest rate adjustments vary from lender to lender and will change over time based on the stability of the mortgage industry.

TIP
Making an extra 1% down payment can actually pay for itself with the loan level price adjustment. Ask the lender to give you a rate quote with an extra 1% down payment. If the interest rate is exorbitant on a conventional loan, ask the lender to quote you an interest rate on an FHA mortgage.


Multi-unit homes and condominiums also earn a rate increase:
PRODUCT Loan Percentage
Multiple-unit property < 60.00% 60.01 to 70.00% 70.01 to 75.00% 75.01 to 80.00% 80.01 to 85.00% 85.01 to 90.00% 90.01 to 95.00% 95.01 to 97.00%
2-unit property 1.00% 1.00% 1.00% 1.00% 1.00% N/A N/A N/A
3-4 unit property 1.00% 1.00% 1.00% N/A N/A N/A N/A N/A
Condominium 0.00% 0.00% 0.00% 0.75% 0.75% 0.75% 0.75% 0.75%

FHA, VA and USDA Interest Rate Adjustments

The FHA, VA and USDA mortgages also require interest rate adjustment, however, the cost is not as severe as the conventional home loans. The government lenders may increase the interest rate cost for loans that exceed the typical lending limit for the county where the home is located. Two to 4 unit owner occupied residences and condominiums can draw a modest rate increase.

FHA, VA & USDA Loans 30 year mortgages
Credit Score Price adjustment
>= 740 0.125%
680 - 739 0.00%
660 - 679 0.25%
640 . 659 0.50%
< 640 1.25%

Jumbo loans, investment properties, second homes, and loan amount can bring on additional price/rate adjustments. Some lenders are also increasing the interest rate based on the state.

How to shop for an interest rate

Now that you know that the interest rate (closing cost) can vary depending on credit score, down payment (or equity), loan amount and other variables. Ask the lender to carefully quote you an interest rate based on your particular situation.

Related articles:

Credit score - What affects it?

How to calculate debt to income ratio

How to make an offer on a house

When can mortgage insurance be cancelled?

What does interest rate lock mean?