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1 tip could save $50,000 on your next mortgage

This simple step is essential for getting you the best possible interest rate on your home loan.

By MSN Money Partner Oct 28, 2013 1:49PM

This post comes from Marilyn Lewis at partner site Money Talks News.


Money Talks News on MSN MoneyReady to apply for a home loan? Here's the one piece of advice that can save you tens of thousands of dollars on your mortgage, plus six more tips to help you get the best mortgage deal you possibly can.


Before you apply for a mortgage, pull your credit history and get your credit score. Why? Cleaning up your credit history and raising your score can make you eligible for the best interest rates on a mortgage.


You'll want to do this as soon as possible -- giving yourself a year to improve your credit.


Borrowers with scores above 720 get the best mortgage rates. They are welcomed with open arms by lenders. If your score is below 720 you can still get a mortgage. But it's more difficult. And it'll cost you more.


The chart below shows you why. You can use your own numbers at MyFICO's Loan Savings Calculator


Lower credit score? Pay more interest

Credit score*

APR**

Monthly payment

Total interest paid

760-850

4.018

$959

$144,848

700-759

4.242

$985

$154,244

680-699

4.421

$1,007

$161,845

660-679

4.636

$1,032

$171,080

640-659

5.07

$1,085

$190,072

620-639

5.62

$1,154

$214,781

*Source: MyFICO; **Annual percentage rate

 

In this chart, you'd pay $195 a month less with a 760 credit score than with a 639 credit score. That's a difference of nearly $70,000 over the total life of your mortgage.


Don't worry that checking your credit report might bring down your credit score. Personal inquiries won't do that.

 

Some credit report services charge a fee for a copy of your credit history. But why would you want to pay for it? You can get a free report from each of the three major credit bureaus -- Experian, TransUnion and Equifax -- at AnnualCreditReport.com, a federally mandated site.


This step-by-step guide tells what to expect when you apply.


What's next? Here are six tips to ensure you’ll get a better rate on your mortgage:

Couple shopping for house © IT Stock Free/A.G.E. FotoStock

1. Fix any errors on your credit report

Comb each credit report for errors and negative items. Don't be surprised if each report shows different items and has unique errors.


Is checking worth it? Decide for yourself. A study released this year by the Federal Trade Commission found that 26% of 1,001 randomly selected consumers who reviewed their credit reports reported a "material error" -- something that affected their credit scores. For 5% of participants, the mistake put them in a greater credit risk tier, which could result in higher interest and insurance rates.


Fix any errors you find. You can complain at the credit bureau's website or send a letter. There's detailed information on the dispute process at this page of the FTC website. If your issue with your credit report is not resolved to your satisfaction, you can file a complaint with the Consumer Financial Protection Bureau.


2. Pull your credit score, too

Don't stop there. Get your credit score, too.


A one-time look at your credit score costs $19.95 at MyFICO.com. The cost isn't the only problem. There's no guarantee the score you're being sold is calculated the same way as the score that will be sold to your lender, when you eventually apply for a loan. A Consumer Financial Protection Bureau study found that in 19% to 24% of cases, consumer scores differed from lender scores sufficiently to land the consumer in an entirely different credit category.


An alternative is to use one of the sources of free credit scores like Credit Karma and Credit.com. Your purpose is to get an idea of what your score is and what you need to do to improve it.


3. Pay down debt

One of the factors in your credit score is your "utilization ratio." That's the amount you owe on credit cards vs. your available credit. For example, if the credit limit on your Visa is $1,500 and your card balance is $900, you're using 60% of your credit limit.


At any time, it's wise to use less than 30% of your available credit. That means, if your limit is $1,500, keep your balance below $450. Note: We're not suggesting you carry a balance from month to month. That would require you to pay interest. Rather, charge no more than $450 before you pay it off.


Now, if you're going to buy a house, improve your score even more by paying off that credit card debt. MyFICO recommends:

Reduce the amount of debt you owe. This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards.
Then come up with a plan to retire that debt.

There's another reason to reduce what you owe. Your mortgage lender will also be looking at your debt-to-income ratio -- how much debt you are carrying compared with your monthly income. This number will affect whether you qualify for a loan and what your interest rate will be.


4. Keep old accounts open

You'll be tempted, as you clean up your credit, to close old accounts you no longer use. Don't do it. At least not before applying for a mortgage.


The reason: Part of your credit score is based on the length of your credit history. Even if you have to pay an annual fee to keep your oldest account open, do it until that mortgage is securely in hand.


5. Pay your bills on time

This is a hard one for many people. It can seem crazy, to be sure. You may think, "I was late on one or two payments but what does it really hurt since I paid the late charge and got back on track?" But it does hurt you. Just one late payment can bring down your credit score.


Play by the rules when it comes to paying credit cards and other bills, even if the rules seem silly to you.


6. Avoid new credit

Don't apply for any new credit -- even a simple store credit card -- before you apply for a mortgage. The reason: Opening a new account or even giving a company permission to look at your credit history might lower your credit score. MyFICO says:

In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score. … Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk.

Of course you'll need to apply for credit when you shop for a mortgage, but FICO treats those inquiries about your credit history differently. They will have no or very limited impact on your credit score, as myFICO explains here.


Have you applied for a home loan or refinance recently? What was your experience like?


More on Money Talks News:

54Comments
Oct 28, 2013 3:06PM
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 MSN needs something to write about. They rerun this one about twice a year. For the most part the people that have good credit already know all these things. The ones that do not know these things are probably hopeless any way.
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Hot tip..... " dont bet on slow horses"

 

Good credit is something that you have to work at...

 

Most people with lower/bad credit dont understand or dont care....

Oct 29, 2013 9:03AM
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.....want a good FICO score...........

 

Pay all your bills on time and live within your means.

Oct 28, 2013 5:33PM
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The FICO risk scoring system is a joke. It is designed to knock your score down and make you pay more than you should for the privilege of borrowing. They make judgments that affect your score without taking into account all the considerations. I just had a conversation with two agencies that report to lenders. Did you know that they will arbitrarily report "amount owed on revolving accounts too high" or "too many consumer finance accounts." This is because they do not take into account that you have a small business, you pay off your credit card bills each month, never late or missed a payment, or your income and net worth is high. Income has nothing to do with their arbitrary determination. As a result even Warren Buffet would get his score lowered. If you refinance then they lower your score because of "lack of recent installment loan information" and "length of time accounts have been established." Like I said it is designed to knock your score lower and there is nothing, absolutely nothing, you can do or say to get it back up. Oh, and to add insult to injury when you call one of the three credit reporting companies they say they did not give you that score. You have to pay $7.95 to each company to actually see what their score for you is, but unless there is a glaring mistake, you can not get the score changed. Like I said the system is a bad joke and it is on us.
Oct 28, 2013 2:40PM
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I'm paying 3.25% on my vacation home. I guess I missed out on big savings. This advice is like telling us to claim all of our allowed deductions to lower our taxes.
Oct 28, 2013 7:24PM
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I am a deadbeat, loser.   Is that why my credit score is so low?
Oct 29, 2013 12:04PM
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Here's a tip: If you can pay an extra $100 a month on your principal, you can shave 7 years off the back end of your mortgage savings you tens of thousands in interest.
Oct 28, 2013 4:14PM
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Don't get quotes from Quicken loans either, or if you do, then go with them, else they will do several hard credit inquiries that show up negatively on your credit score.  I did this and then had to explain the sudden drop in my score to the lender I eventually chose.
Oct 28, 2013 9:06PM
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Better to not buy it if you can't pay for it..... I know this sounds different by todays standards but you can do it and you'll live longer with less heart ache and at some point be successful. Plus you never need to worry about your credit.  
Oct 29, 2013 11:38AM
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One tip to save money that they don't provide, is to opt for a 15 year loan instead of a 30 yr.  Also, if you must opt for the 30 year, start making extra principal payment as soon as you can afford to, to pay your loan off quicker.  These tips will really help you save on that interest.
Oct 28, 2013 9:05PM
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All of these things is what Loan officers already do. Pulling credit too many times LOWERS scores. Also Mortgages do not pull credit from the big 3. They pull it from 4th party companies like Advantage and Advantus that pull from the big 3. Pulling your own credit doesn't help with the 4th party companies. They have all together different rules for deleting accounts.

Trans Union wrote a letter to one of the 4th party companies that they did not even report a particular account on my credit and they still did not delete it. They wanted me to pay them. Credit companies are extortionist & its price fixing. They are illegal & useless.
Oct 29, 2013 2:17PM
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Love it... article has "720+ get best rates" and show table with 760+ getting best rates...
Oct 28, 2013 2:57PM
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What B.S. you can't "clean up" your credit score! Ever successfully dispute something on your credit report? Good luck suckers.

Oct 28, 2013 3:06PM
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Boy you 3 previous posters are really awesome aren't you???
Oct 29, 2013 8:14AM
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What is this credit they speak of? My credit score is 0 and I still bought a house. 100% down payment is the way to buy a house!
Oct 28, 2013 3:16PM
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Natural selection process in action!
Oct 29, 2013 1:38PM
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Thanks! So is it also true that if I save money every month It'll grow due to interest and I'll have more later?
Oct 29, 2013 7:20PM
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"A one-time look at your credit score costs $19.95 at MyFICO.com. The cost isn't the only problem. There's no guarantee the score you're being sold is calculated the same way as the score that will be sold to your lender, when you eventually apply for a loan."

 

lol,sounds like the banks own this place too.

 

"The reason: Part of your credit score is based on the length of your credit history. Even if you have to pay an annual fee to keep your oldest account open, do it until that mortgage is securely in hand."

 

Another bank payoff. The article is full of basically corrupt crap.

Don't even try to contact the 'scoring agencies.' A person won't answer and they don't even respond. Guess I'll have to try the link to file a complaint against at least 1 of them.

Oct 29, 2013 7:18PM
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Good article.  I know most of things but it's always a good reminder.  I know not to eat or drink too much but I do that too.
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