740 Credit Score Needed to Get the Best Mortgage Deals in 2014?

A recent study conducted by the real estate information service Zillow revealed some useful insight into consumer credit scores. It seems that borrowers need a credit score of 740 or higher to qualify for the lowest mortgage rates.

This is based on an extensive review of 13 million loan quotes and more than 225,000 purchase loan requests generated through the company’s online “Mortgage Marketplace.”

These findings reflect the anecdotal reports we have received from lenders, which also point to the 740 credit score as a key cutoff point for mortgage rates. The message is clear. Borrowers who want to qualify for the lowest rates in 2014 should pay close attention to their credit scores. The best deals are currently going to those in the 740-and-up range.

Borrowers with scores of 620 or below found it difficult to qualify for a mortgage loan at all, according to the study.

Credit Scores Are a Risk-Assessment Tool for Lenders

What is a credit score? Where do the numbers come from? Why do mortgage lenders care so much about them? Here’s a crash course in consumer credit scoring, in 100 words or less:

Your credit score is a three-digit number derived from information found within your credit report. There are different types of scores produced by different companies. This story relates to the FICO credit score in particular, which ranges from 300 – 850. A higher number is better. Mortgage lenders use these scores for risk-assessment purposes. A higher score makes you a lower risk for the lender, and vice versa. Low-risk borrowers have an easier time getting approved for mortgages, and typically secure lower interest rates on their loans.

In 2014, borrowers will probably need a score of 620 or higher to qualify for a home loan, and 740 or higher to get the lowest mortgage rates available. But these numbers are not set in stone.

740 Is the New 720, When it Comes to Getting the Best Mortgage Deals

Over the last few years, borrowers would’ve needed a FICO credit score of 720 or higher to qualify for a lender’s best rates. That was the most commonly used cutoff point to qualify for the lowest mortgage rates. But that standard seems to have moved upward over the last year or so, if Zillow’s findings are any indication.

According to the press release that announced the findings: “the bar has risen for borrowers to get the lowest available mortgage rates. The best mortgage rates are typically reserved for those with credit scores of 740 or higher, compared with 720 in 2010.”

According to MyFICO.com (which is owned by the company that created the FICO scoring system), about 40% of borrowers in the U.S. have 740 credit scores or higher. That means most Americans will not qualify for the best rates in 2014.

Keep in mind this is the score needed to the best deal on a home loan, which translates as the lowest possible interest rate available at the time of application. This is not the score needed to qualify for a mortgage. That bar is set more than 100 points lower, at around 620 on the FICO scale (learn more).

It’s also important to realize there are other factors that affect the mortgage rate you receive from a lender. The type of home loan you choose also plays a role, as does the size of your down payment. ARM loans generally have lower interest costs than their fixed-rate counterparts, at least in the first few years. Borrowers can also pay discount points at closing — a form of prepaid interest — in order to “buy down” the rate applied to their loans.

But the credit score still weighs the most. So it deserves your full attention.

How to Get the Lowest Rates in 2014

Planning to apply for a mortgage loan in 2014? Want to qualify for the lowest possible rate? Here are four things you can do to improve your chances for success:

  1. Check your credit. You need to know where you stand right now, in order to plot the best course forward. Get your free credit reports from AnnualCreditReport.com. It’s the official, government-regulated source. You can purchase your scores from MyFICO.com, the company mentioned earlier.
  2. Pay your bills. Your payment history affects your credit score more than any other individual factor. A pattern of late payments on credit cards, personal loans, car loans, or mortgages can wreck your score. So pay those bills on time, every time.
  3. Pay points. This is a common strategy used by borrowers. One discount point equals 1% of the loan amount. A single point paid at closing could lower the mortgage rate by 1/4 to 3/8 of a percentage, on a 30-year fixed home loan. The exact size of the reduction will vary based on the lender and the loan program, so ask for details up front.
  4. Consider the ARM. Adjustable-rate mortgage (ARM) loans are often vilified as being a primary cause of the housing crisis. But this is not entirely accurate. When used responsibly, ARMs can actually benefit the borrower. For instance, a home buyer who only plans to live in a home for three to four years could use a 5-year ARM loan to secure a lower mortgage rate. He or she could then sell the property prior to the uncertainty period, when the rate begins to adjust.

Of course, it helps to have a credit score of 740 or higher. If you fall into this category, you’ll have an easier time negotiating the interest rate and other aspects of your loan.

Disclaimer: This article explains how to qualify for the lowest mortgage rates in 2014. It is based on information and data provided by third-party sources. Such data are deemed reliable but are not guaranteed. The rate you receive from your lender will depend on a variety of factors, including (but not limited to) your credit score.