Getting a Personal
Cash Advance in Spite
of Poor Credit
How Credit Scores Impact
Your Mortgage Rate
by Sheyna Steiner
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.
Credit is so tight and lenders are so skittish that buyers below a certain threshold, typically a FICO score of 620, have a better chance of striking oil in their bathtub than securing a mortgage. It's possible, but will require some digging.
Standards have not always been so restrictive; the industry has changed in recent years.
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.
Some types of credit may be viewed more negatively than others, particularly if there's not a healthy mix of available credit and loans on your report.
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.
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 percent 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.
If you've done all you can to hike up your score and still are not happy with the interest rate lenders offer, you may be able to buy down your rate. The typical range is 1 percent to 3 percent of the home-loan amount.
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.
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.
Copyright 2010 Scripps Howard, Inc. All Rights Reserved
Source: Scripps Howard News Service February 18, 2010, www.shns.com/ BYLINE: SHEYNA STEINER, www.bankrate.com, (Distributed by Scripps Howard News Service. Reach Sheyna Steiner at editors@bankrate.com)
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