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If you’ve been tracking mortgage rates, you know they’ve been on quite the roller coaster. Rates were under 4% as recently as last March, peaked above 7% in November and then settled at just over 6% in the early weeks of 2023, all according to mortgage investor Freddie Mac.

The recent decline is good news for home buyers—but be warned: Those rates are just averages.

In reality, mortgage rates are highly personalized. And while average rates can give you a ballpark of what to expect as a borrower, your finances—and specifically, your credit score—will really determine your interest rate in the end.

“A person’s credit score is typically where we start in the mortgage process,” says Mary Bane, who leads offices across the Midwest for mortgage lender loanDepot. “When we’re talking to a client, the first thing we’ll say is, ‘Hey, do you have any idea what your credit score might be?’”

How much of a difference can that score make and what number should you be aiming for? Here’s what you need to know.

How does your credit score affect your mortgage rate? 

In a lender’s eyes, your credit score indicates the risk you pose as a borrower—the likelihood that you’ll make your payments as agreed.

“A credit score is a simple, three-digit number that’s meant to represent a consumer’s relative risk,” says Joe Mellman, head of TransUnion’s mortgage business. “A score that’s higher than another really just says that this person is more likely to pay back a debt than the person with a lower credit score.”

Credit scores, which were created by the Fair Isaac Corp. in 1989, can range from 300 to 850. Once lenders know your FICO score, they can determine how much interest to charge to offset the risk. 

“When it comes to homeownership, your credit score is a major factor in determining what your loan terms will be,” says Patricia Maguire-Feltch, national sales executive at Chase Home Lending. “Essentially, the higher your credit score, the higher your chances of not only being approved for a mortgage, but also qualifying for the best rates and terms.”

Generally speaking, borrowers with credit scores of 760 or higher get charged the lowest interest rates. On conventional conforming loans, which must adhere to Fannie Mae and Freddie Mac guidelines, a 780 may qualify you for a slightly lower rate—though it depends on your down payment amount.

“Ultimately, any score in the 700s or above is considered good and will help you qualify you for lower interest rates,” Maguire-Feltch says.

Here’s a look at the average mortgage interest rates per FICO score as of Feb. 15, 2023.

If you have a 30-year fixed-rate mortgage with a starting balance of $400,000, at a 6% rate your monthly payment would be $2,398 (not including taxes and fees). At a 7% rate, however, you would pay $263 more each month.

What credit score do you need to qualify for a mortgage at all? 

The exact score you’ll need depends on the loan program, but typically, you can qualify for most mortgages with a 620 credit score or higher.

Some loan programs, particularly government-backed options including from the U.S. Federal Housing Administration, Agriculture Department and Department of Veterans Affairs loans, allow for lower credit scores. As Bane explains, “Those are going to be much more flexible on credit score.”

With FHA loans, borrowers can technically have scores as low as 500. Private lenders that make the loans can require higher scores and most do. Rocket Mortgage, for example, requires at least a 580.

“Every loan is different,” Maguire-Feltch says. “There is no single, specific credit score that will automatically qualify you for a mortgage.”

What else determines your mortgage rate? 

Your credit score plays a deciding role in what mortgage rate you get, but it is not the only factor lenders consider. Your debt-to-income ratio—or how much of your monthly income goes toward debt payments—is also important. Typically, lenders want your DTI to be 43% or lower (though the lower yours is, the better.)

“A higher ratio looks more risky to lenders because it means you’d have less money left over for a mortgage payment, after other monthly debt obligations are met,” Maguire-Feltch says. “Generally, a higher DTI can mean a lower chance of qualifying for a mortgage or a higher rate if you do qualify.”

The size of your down payment also factors in. Larger down payments mean the lender has less on the line if you fail to make your payments, so they often give a lower rate. Smaller down payments increase the lender’s risk and can do the opposite.

Finally, the lender you choose matters, too. Because every company has its own operational capacity, profit margins and other unique conditions, they charge different rates and fees. One study by Freddie Mac found that rates offered by different lenders varied by as much as 0.60 percentage points for a single borrower—the difference between a 6.4% rate and a 7% one (or about $140 a month on a $350,000 loan). 

How to check your credit score

To get your credit score, check your banking or credit card dashboard if you have one. Many come with automatic credit score monitoring, allowing you to check your score at any time.

Just keep in mind which score they’re showing you. Technically, you’ll want your scores from the three major credit bureaus—TransUnion, Equifax and Experian—to get the most accurate picture. 

“There are three scores that we look at,” Bane says. “We then take the middle score.”

If you had a TransUnion score of 730, an Equifax score of 745 and an Experian score of 715, for example, lenders would use 730—the middle of those scores—to qualify you for loan programs and set your rate. If you’re applying with another person, including your spouse or a family member, lenders will usually take the lowest of the two middle scores between you (or, on some loans, the average of your two middle scores, if you’re on the cusp of qualifying). 

If your bank only shows you one of these scores, you can purchase the others directly from the credit bureaus for a small fee. Just make sure you’re purchasing the score and not just a general credit report. Basic credit reports only include information about your accounts and payment history—not scores.

Steps to improve your credit score

There are many ways to improve your credit score—some easier than you might think. Here are a few strategies that can help:

1. Make on-time payments

The best way to improve your credit score is to avoid late payments—particularly on student loans, credit cards and other types of debts that get reported to credit bureaus. In some cases, other items, including overdue cellphone bills and utilities, will also impact your score—but not always. 

To be safe, Mellman says, “Try to make sure that you’re on time for all your payments. That is one of the single biggest contributors to a credit score—and one of the single biggest things that a consumer has control over.” 

2. Reduce how much credit you’re using

You should also reduce the balances you carry on your credit lines—ideally to 30% of your total credit line or less. If you have a $10,000-limit credit card, for instance, you would want to reduce your balances to no more than $3,000.

“Try not to use all of your credit,” Mellman says. “But it is healthy for your credit score to use some of it. You don’t want to go the opposite direction where you’re not using any credit. That doesn’t necessarily help your credit score.”

One way to keep your balances under 30% is to ask for a credit line increase. For instance, if you had a $4,000 balance on a credit card with a $10,000 limit, you’d be using 40% of that credit line. However, if you increased that credit line to $12,000, your balance would shrink to just 30%. Just be prepared: In some cases, credit card companies may run your credit to increase your limit, which could hurt your score temporarily. Always ask upfront if your issuer plans to make a hard inquiry into your credit.

3. Avoid opening new accounts

Hard credit inquiries—which occur when a lender pulls your credit report before opening a new loan or account—go against your score. According to FICO, one inquiry usually equates to a five-point drop in credit score.

Only inquiries within the last 12 months count, though, so once you know buying a home is on your horizon, avoid applying for any new credit cards or loans unless they’re absolutely necessary.

And when you do start shopping for a mortgage, apply for quotes all within a short time period. This ensures they’re only counted as one hard inquiry, minimizing the damage to your score.

4. Start early

Ultimately, if you want to improve your credit score before buying a house or applying for a mortgage refinance, Mellman says it’s important to start early—at least six to 12 months before you plan to apply.

“This is something you want to do well ahead of time,” Mellman says. “The more time your changes have to be reflected in your credit data, the more impact they’ll potentially have.”