As mortgage rates rise sharply and mortgage refinancing volumes plunge, American mortgage borrowers’ credit scores are declining a bit. However, most borrowers who qualify for mortgages have near-perfect credit scores.

The typical credit score for mortgage borrowers dipped to 776 in the first quarter of 2022, down from 778 in the fourth quarter and just off the first quarter’s record high of 788, the Federal Reserve Bank of New York said in its latest quarterly report. During the era of loose lending that led to the Great Recession, by contrast, the median credit score of mortgage borrowers fell to as low as 707.

Meanwhile, only a quarter of borrowers who landed home loans during the winter months had credit scores of less than 723. Just 10 percent had credit scores below 674, according to the New York Fed’s data.

In 2020 and 2021, numbers were pushed upward in part by the large share of mortgage refinancings. People who already own homes generally have higher credit scores than first-time buyers — they’ve had more time to build their credit histories, and on-time payments of a mortgage provide a strong boost for a consumer’s credit score.

Refinancing grew less attractive as mortgage rates jumped starting in late 2021. As a result, refinance volumes have dropped sharply, the New York Fed says.

A symptom of the K-shaped recovery

Americans’ fortunes have diverged widely during the pandemic. Those who could work remotely continued to collect paychecks. Home prices have soared, and stocks reached new records before the recent correction.

However, lower-wage workers struggled as restaurants, hotels and other service-sector employers were battered by the pandemic. Economists have invoked the K-shaped recovery to describe the disconnect — affluent Americans’ fortunes are rising like the top half of the letter, while the working classes are experiencing the downward slope of the bottom half of the K.

The highest possible credit score in the FICO system is 850. A score higher than 740 is considered excellent.

“A FICO score is not an indication of wealth,” says radio host and author Chris Hogan, a personal finance expert. “It’s more of an indication of how you’ve dealt with debt.”

Rising scores come with an upside for both lenders and borrowers: A homeowner with a credit score approaching 800 is exceedingly unlikely to default. For borrowers, that means little risk of a financially devastating foreclosure.

“If you sign on to buy a home before you’re ready, it can be more of a curse than a blessing,” Hogan says.

What you can do about your credit score

Your credit score is the single most important factor in determining your mortgage rate. Here’s how you can boost it — and what to do if your score won’t go any higher:

Pay down credit card debt: If you have a choice between tackling debt or scraping together a larger down payment, it’s wiser to focus on the debt, because that should improve your credit score.

Pay monthly bills on time: Payment history plays the biggest part in your credit score. To keep from forgetting to write a check, automate your routine payments. To avoid a missed payment, build your emergency savings.

Consider an FHA or VA loan: Compared to conforming loans backed by Fannie Mae and Freddie Mac, mortgages backed by the Federal Housing Administration and the U.S. Department of Veterans Affairs carry less stringent rules about credit scores. However, the upfront fees are higher.

Know when enough is enough: The best mortgage deals go to borrowers with scores above 740, but improvements beyond that point won’t do much to affect your rate. Keep an eye on your score, of course, but understand that boosting it from 790 to 800 won’t get you a better deal.

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