When you’re in the market for a new home, your credit score can be the difference between securing your dream property and facing rejection, or between an affordable monthly payment and one that stretches your budget to the breaking point. With the average 30-year fixed mortgage rate hovering around 6.5% in 2025, the stakes are high. According to a recent Federal Reserve study, borrowers with excellent credit scores (760+) pay, on average, 1.5 percentage points less on their mortgage rates compared to those with poor credit (below 650).
Below, we’ll look at the connection between credit scores and mortgage rates, explain what each score range means for your borrowing power, and offer proven strategies to improve your score.
What Is a Credit Score and How Is It Calculated?
A credit score is a numerical representation of your creditworthiness, essentially telling lenders how likely you are to repay borrowed money. The most widely used scoring model is FICO, which generates scores ranging from 300 to 850.
Your credit score is calculated based on five key factors, each weighted differently:
Payment History (35%)
Your track record of paying bills on time is the single most important factor in your credit score calculation. Even one missed or late payment can significantly impact your score, while consistent on-time payments build a strong foundation for good credit.
Credit Utilization (30%)
This measures how much of your available credit you’re currently using. For example, if you have a $10,000 credit limit across all cards and carry a $3,000 balance, your utilization is 30%. Lower utilization rates demonstrate responsible credit management, with experts recommending keeping this ratio below 30% for the best scores.
Length of Credit History (15%)
Longer credit histories provide more data about your borrowing habits, allowing lenders to better assess risk. This includes the age of your oldest account, the average age of all accounts, and how recently you’ve used certain accounts.
New Credit Inquiries (10%)
Applications for new credit generate “hard inquiries” on your credit report, which can temporarily lower your score. Multiple inquiries in a short period may suggest financial distress to lenders.
Credit Mix (10%)
Having a diverse mix of credit types—such as credit cards, auto loans, student loans, and mortgages—can positively impact your score by demonstrating your ability to manage different types of debt.
Credit Score Ranges and Their Impact on Mortgage Rates
Your credit score falls into one of several ranges, each with different implications for mortgage approval and interest rates:
| Credit Score Range | Rating | Typical Mortgage Rate Impact |
| 760+ | Excellent | Best interest rates, lowest monthly payments |
| 700-759 | Good | Competitive rates, slightly higher than top tier |
| 650-699 | Fair | Higher interest rates, may require larger down payment |
| 600-649 | Poor | Limited loan options, significantly higher rates |
| Below 600 | Very Poor | May struggle to qualify for a mortgage at all |
Each lender sets its own thresholds for these categories, but these ranges provide a general guideline for what to expect when shopping for a mortgage.
How Your Credit Score Affects Your Mortgage Interest Rate
The relationship between your credit score and mortgage rate is straightforward: the higher your credit score, the lower your interest rate is likely to be. This correlation exists because lenders use your credit score as a primary indicator of risk.
To illustrate this impact, consider two borrowers applying for a $300,000, 30-year fixed-rate mortgage:
- Borrower A has an excellent credit score of 760+ and qualifies for a 5.5% interest rate
- Borrower B has a poor credit score of 620 and receives a 7% interest rate
The financial implications of this difference are substantial:
- Borrower A’s monthly payment: $1,703
- Borrower B’s monthly payment: $1,996
This $293 monthly difference adds up to $3,516 annually and a staggering $105,480 over the life of the loan. This example demonstrates why even small improvements in your credit score can yield significant financial benefits when purchasing a home.
Loan Types and Minimum Credit Score Requirements
Different mortgage products have varying credit score requirements:
Conventional Loans
These loans, which aren’t backed by the federal government, typically require a minimum score of 620 for approval. However, to qualify for the most competitive rates, a score of 740 or higher is often necessary. Borrowers with scores between 620-660 may face higher interest rates and could be required to make larger down payments.
FHA Loans
Insured by the Federal Housing Administration, these loans are more accessible to borrowers with lower credit scores. While FHA loans technically allow scores as low as 500, most approved borrowers have scores of at least 580. Borrowers with scores between 500-579 must make a minimum 10% down payment, while those with scores of 580 or higher may qualify with just 3.5% down.
VA Loans
Available to eligible veterans, active-duty service members, and surviving spouses, VA loans have no official minimum credit score requirement. However, most VA lenders impose their own minimums, typically around 620. These loans offer the advantage of no required down payment.
USDA Loans
These loans, designed for rural homebuyers with moderate to low incomes, typically require a minimum score of 640 for streamlined processing. Lower scores may be considered but will require additional documentation and underwriting.
Summary of Credit Requirements by Loan Programs
| Loan Type | Minimum Credit Score | Down Payment Requirement | Best For |
| Conventional | 620+ (ideal: 740+) | 3-20% (typically 20% for best rates) | Borrowers with good to excellent credit |
| FHA | 500+ (ideal: 580+) | 10% for scores 500-579<br>3.5% for scores 580+ | First-time homebuyers and those with lower credit |
| VA | No official minimum<br>(typically 620+ preferred) | 0% down payment option | Eligible veterans, active military, and surviving spouses |
| USDA | 640+ preferred | 0% down payment option | Rural homebuyers with moderate to low income |
| Jumbo | 700+ (varies by lender) | 10-20% (often 20%+) | Borrowers needing larger loan amounts above conforming limits |
How to Improve Your Credit Score Before Applying for a Mortgage
If your credit score needs improvement before applying for a mortgage, consider these strategies:
Pay Bills on Time
Since payment history accounts for 35% of your credit score, establishing a consistent record of on-time payments is the most effective way to improve your score. Set up automatic payments or electronic reminders to avoid missing due dates.
Reduce Credit Card Balances
Aim to lower your credit utilization ratio to below 30% by paying down existing balances. If possible, try to get this ratio even lower—many consumers with excellent credit maintain utilization below 10%.
Avoid Opening New Credit Accounts
Each new credit application can lower your score slightly, so refrain from applying for new cards or loans in the months leading up to your mortgage application. This includes store credit cards, which might seem harmless but still impact your score.
Check Your Credit Report for Errors
Obtain free copies of your credit reports from all three major bureaus through AnnualCreditReport.com and review them carefully for inaccuracies. Dispute any errors you find, as removing incorrect negative information can quickly boost your score.
Build a Longer Credit History
Keep older credit accounts open, even if you rarely use them. The length of your credit history positively influences your score, so closing old accounts can actually hurt rather than help.
Can You Get a Mortgage with Bad Credit?
While having poor credit makes the mortgage process more challenging, it doesn’t necessarily make homeownership impossible. Consider these options if your credit score is less than ideal:
FHA and VA Loans
As mentioned above, these government-backed loans typically have more flexible credit requirements than conventional mortgages, making them a good option for borrowers with lower scores.
Larger Down Payment
Making a substantial down payment can help offset the risk associated with a lower credit score. Some lenders may be willing to work with lower-score borrowers who can put 20% or more down.
Co-signer
Having a co-signer with excellent credit can improve your chances of approval and potentially secure better rates. However, this approach places significant responsibility on the co-signer, who becomes equally liable for the loan.
Work with a Mortgage Broker
Mortgage brokers have relationships with multiple lenders and can help match you with those more willing to work with lower credit scores.
Consider Waiting
Sometimes the best strategy is to delay your home purchase while actively working to improve your credit score. Given the significant long-term savings associated with better rates, waiting 6-12 months to boost your score could be financially advantageous.
Conclusion
Your credit score plays a major role in determining not only whether you’ll be approved for a mortgage but also the cost of that loan over time. Even small improvements in your score can translate to thousands of dollars in savings throughout the life of your mortgage.
Before beginning your home search, take time to check your credit score and address any issues that might be dragging it down. Your efforts toward improving your credit score now will pay dividends in the form of better loan options, lower interest rates, and reduced stress during the homebuying process.
Remember that each lender has different criteria, so even if your score isn’t perfect, it’s worth shopping around to compare offers from multiple mortgage providers. With preparation and persistence, you can position yourself for the best possible mortgage terms regardless of your current credit issues.
