How To Get A Better Mortgage Rate

How To Get a Better Mortgage Rate By Improving Your FICO Score

The American dream has always included home ownership, a place where a man can raise his family free from government oversight. That dream is still attainable even in today’s economy, but it must be tempered with common sense to prevent your dream from becoming your worst fiscal nightmare.

The biggest expense of home ownership is, of course, the monthly mortgage payment that you make. This payment includes 2 basic amounts, one that is applied to the principal, which represents the amount of the loan that you secured from your lender. The second is the cost of the loan to you, the interest rate. This is the amount that the lender has decided to charge you in order to carry your loan. Your lender determines what interest rate it will charge based mainly on your FICO score, a tool developed by the Fair Isaac Corporation which is used by most financial institutions to discover your credit worthiness, or your likelihood to pay debts in a timely manner. A good FICO score of 700 or more will get you one of the best rates, while a score below 600 could add 1 to 1 ½ percent more, which could translate into $150 - $300 more per month depending on the amount borrowed. As you can see, it is in your best interest to make sure that your score is the best it can be and to improve it if you can.

So long before you wish to apply for a loan, it would be a good idea to pre-empt your lender to see what your credit score is before they do. You can get your report by calling or visiting the websites of the three major credit bureaus:

• Equifax 1-800-685-1111
• Trans Union 1-877-322-8228
• Experian 1 888 397 3742

If you have to pay then don’t balk at the expense, because your lender will definitely look at your score, and you need to see it before they do because there might be a problem or a mistake in your report which would definitely hurt you and this would be the perfect time to correct it.

Now you have your score, and everything looks ok. There are no bad charges, no extra accounts you didn’t know about, or no duplicate accounts so you can start the process of improving your score, if necessary.

The number one way to improve your score is to pay your bills on time. Like most employers, lenders hate tardiness. Just one late payment can send your FICO score tumbling, so if you know you can’t make the entire payment then at least make the minimum payment and make sure it’s there on time. If you realize that your payment will be late if you send it through the postal service, then do what you must to get that payment to the lender before the deadline. That means spend the extra money to pay by phone or express mail it.

Believe me, that will be money well spent because it will prevent your FICO score from taking a hit, prompting the lender to add to the interest rate you will get, costing you extra money every month.

Also make sure that you haven’t opened several new credit cards before you apply for a loan. This will put up a red flag to lenders, because statistically speaking, folks with a lot of new credit are bad credit risks, and you don’t want the term credit risk to be associated with you, especially when you will be applying for a mortgage. Also, don’t fall for that gimmicky 10% off when you apply for a department store credit card, because the limits are generally low and you don’t need the extra credit inquiries.

While we’re on the subject of credit cards, let’s make sure that you pay off all your balances or at the very least get them as low as possible, to around 30% of the available balance, before you make that mortgage application. And also ask the bank that holds your credit card to raise your credit limit. These steps will do wonders to improve your debt to credit limit ratio, which is a big part of how the FICO score is generated. The higher your credit limit and the lower your debt translates to a better ratio for you which in turn would translate into a better interest rate. Of course, you must remember that the higher credit limit really isn’t to be touched, it should just sit there unused, because the object of this exercise is to lower your debt to credit limit ratio. If you use it, then you would be ruining your ratio leading to a much higher interest rate once you apply for your mortgage.

Following these simple steps will definitely help you raise your FICO score, helping you get the best interest rate you can when you do apply for a mortgage. If, however, you have had credit problems in the past, then don’t despair because you can still improve your score. You just have to realize that it will take determination to change your spending habits and to use any credit you have responsibly. Do this month after month, paying your debt down and making those payments in a timely fashion, and over time your good credit habits will raise your score. It might take a year or more but it can be done.
Good Luck!