**EDITOR’S NOTE: Citizens National Bank sent the following information out to real estate agents, appraisers, etc today and we thought it was great information for our readers considering the recent changes in the lending industry. We hope it is helpful.**
Interest paid on a mortgage can add up to hundreds of thousands of dollars over the life of the loan. The most influential determinant of your mortgage rate will be your credit score. The higher your score, the lower the interest rate. On a loan as large as a mortgage, a mere percentage point up or down can add up to a significant amount of money.
Not only are credit scores more vital than ever when it comes to getting a good rate on a home loan, but they will influence whether you can even get a loan at all. Standards have not always been so restrictive; the industry has changed in recent years. It’s changed twofold: First there is a minimum score that you need to have to even be considered for a mortgage And unless you have top-tier credit, you’re not going to qualify for the best programs, terms & conditions.
Though the tiers go up all the way to 850 on the FICO scale, a score of 740 or more should qualify for the best mortgage rates from most lenders. Depending on the lender, the mortgage rates offered to the highest and lowest credit tiers can vary as much as a full percentage point and a half.
Lenders prefer borrowers with low balances, a long history of on-time payments and a mix of credit utilization — for instance, a car loan and a couple of revolving accounts such as credit cards. Whether you believe your credit report to be pristine and unmarred by financial indiscretions, the ideal time to check it out for yourself is up to a year before buying a home.
Go to AnnualCreditReport.com to get your yearly free credit reports from Experian, TransUnion and Equifax. Make sure you get reports from all three because lenders look at all three scores and use the middle one, according to Hackett.
Consumers should be on the lookout for any information that doesn’t belong on their credit report or that is incorrect. In 2007, a survey by Zogby found that 37% of consumers find errors when they check their credit reports.
If the account is closed, make sure that is accurately reflected on the credit report. Dispute any errors you find. If everything is correct, pay down balances and let time do the rest. Try not to apply for new credit if you’re thinking of buying a home in the near future. Though it’s not always avoidable, you should resist opening several new lines of credit at once. A couple in a year is fine. Four or five in a year will start to have an impact. The best way to think of it is that you don’t want to appear credit-hungry, so you don’t want to apply for a lot in a short period of time.
Another way to get a premium interest rate is with a big down payment. Understandably, banks feel less jittery about your prospects of defaulting on the loan with a down payment of 25 percent or more.
The down payment is the second-most-important criteria after your credit score because that is one of the mechanisms the bank uses to gauge how risky the loan is.
Transforming your credit report won’t happen overnight, but with time and consistency anyone can get to the elite levels of mortgage pricing and save a ton of money in the long run.
