What Mortgage Interest Rate Can You Get With a Credit Score of 720?

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Getting a mortgage can be a nerve-wracking experience, especially when you find out that your credit score might determine the actual rate you pay. And while a 720 is considered a good score, the scoring system goes up to 850, which raises the question: "what will my mortgage rate actually be?"

Although we can't tell you exactly what your mortgage rate will be, we can give you some idea how your credit score will affect your rate and other things related to your mortgage payment, like your private mortgage insurance premium.

How credit scores affect mortgage loans

I was a Realtor for a decade, and I worked with all kinds of borrowers, from first timers to chronic investors, and nearly everyone is worried about what their mortgage payment will look like.

The truth is that your credit score may affect your rate -- but it might not, depending on the mortgage type you're getting. Mortgages like the very popular FHA mortgage loan program only require that you have a credit score good enough to qualify. There's no additional pricing baked in based on your credit score.

Since FHA is a government-backed mortgage, like VA and USDA loans, the risk of the lender being left holding an empty bag should the borrower default is excessively low, meaning that risk-based pricing doesn't figure into the equation. All these borrowers are equal in risk as far as anybody is concerned.

However, for conventional loans purchased by Fannie Mae and Freddie Mac, penalty pricing does come into play, both for the loan itself and for any mortgage insurance associated with it.

Loan level price adjustments and conventional loans

I'm sorry if you came here looking for just a number and not an explanation as to how the number came about, but you got me as your writer, and here we are, on this educational road trip together.

When you borrow money from a mortgage lender using a conventional loan product, you're not ever borrowing directly from Fannie Mae or Freddie Mac -- instead, you're borrowing from the lender. Its goal is to sell your loan to these institutions that purchase loans meeting specific criteria.

Because it's a riskier situation for the banks, they're pricing you based on your risk, rather than knowing beyond a shadow of a doubt that the government will have your back if you default. This is where loan level price adjustments (LLPA) come in.

With a score of 720, on a 30-year fixed-rate mortgage, loans destined for Fannie and Freddie may add from 0% to 1.25% to the base mortgage rate on the day you lock your loan offer in. It's based on how much your loan-to-value ratio is -- but it's not straightforward.

Before we go further, your loan-to-value (LTV) ratio is a comparison of the amount you've borrowed to how much your home is actually worth. So, for example, if you borrow $300,000 to buy a $350,000 house, your LTV is 85.71%.

The highest LLPAs go to LTVs between 75% and 85%, and while it's not stated as such, this has to be due to this group representing more lending risk, since lenders tend to assign higher rates to borrowers they construe as having higher risk. The 80% to 85% band has the highest LLPA across all credit scores.

If you have an LTV below 60%, well, expect to have a loan at the base mortgage rate if your score is above 640, but LTVs either below 75% or above 90% have smaller LLPAs than the danger band between LTVs of 75% to 90%.

Another way your credit score can affect mortgage pricing: PMI

While your mortgage interest rate is important, so are the other expenses that will be part of your final mortgage payment. It's fairly well-known that your homeowners insurance can be influenced by your credit score, but maybe less well understood that your mortgage insurance can, too.

If you're borrowing a conventional mortgage with less than a 20% down payment, expect to pay private mortgage insurance as part of your payment. Unlike with the mortgage insurance premium for FHA loans, the PMI with conventional loans uses risk-based pricing that heavily considers your credit score.

One of the biggest providers of PMI to lenders, Mortgage Guaranty Insurance Corporation, MGIC, publishes its rate charts online, making it easy to take a stab at what your PMI costs may be.

With a 720 score, and a 30-year fixed rate mortgage, you can expect your premium for most conventional loan programs to start at 0.23% and go up to 0.87% yearly. That is to say, you'll pay 0.23% to 0.87% of your outstanding loan balance yearly, divided into 12 payments, for the recommended coverage based on your loan's LTV. The more you pay your mortgage down, the better the rate will get until you reach 80%, when you'll no longer be required to carry PMI.

Your credit score doesn't have to affect your mortgage rate

Although I've demonstrated how your credit score can affect your mortgage rate, it certainly doesn't have to, if you choose to go with a government-insured mortgage rather than a conventional loan. If you're shopping for loans, it's always smart to price both an FHA loan and a conventional loan, because as you can see, the interest rate on the conventional mortgage can vary widely depending on your circumstances. Sometimes FHA really is the better deal.

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