The single best tip to getting the best rate on a mortgage is to check your credit score and credit history. Don’t check it just before applying; check it in advance, up to a year in advance of when you are planning to apply for the mortgage. When it comes to applying for a mortgage, your credit isn’t the main thing – it’s the only thing.
To see how this works in the real world, take a look at the following example. If you are applying for a $200,000 mortgage and have a credit score of 620, you may qualify for a rate of 5.7%. The same loan with a credit score of 760 would potentially secure a rate of 4.18%. This may not sound like much, but over the course of the loan, the higher rate would end up costing you almost $67,000. That’s enough to put your kids through college, or retire a little earlier than you planned.
Here are several steps to get your credit cleaned up and ready for the optimal interest rate:
- Go to annualcreditreport.com and get your free credit report from all three agencies. Review and dispute any inaccuracies.
- Pay down your debt. You shouldn’t be using more than 30% of your available credit.
- Don’t close old accounts. The longer your credit history, the better.
- Pay your bills on time, all the time. One late payment on your credit history is one too many.
- Avoid new credit. At least while waiting to get an optimal loan, it’s a good idea to not open any new accounts. These can temporarily lower your credit score and shorten the average length of your credit history.
This may sound like a lot of work, but it is worth it in the end, as it can save you tens of thousands of dollars.