Interest rates are still near historic lows — which cannot last forever. Meanwhile, as the cost of rental homes pushes into the stratosphere, in many markets it’s worth considering whether it’s time to get into the housing market instead of renting.
If you’re thinking of buying a house or refinancing your existing mortgage, read on for information that will save you money and heartache.
1. Check your credit reports
Your first move – long before you start home shopping – is to find out where you stand with mortgage lenders and how to improve your position. (Read: “This Tip Could Save You $50,000 on Your Next Mortgage.”)
Check your credit reports for problems or errors. This won’t give you your credit score, but the information in your credit reports is the basis for your score. It takes time to fix any errors so get going as soon as possible before applying for a mortgage.
A cleaned-up credit report can raise your FICO score. With a score above 760 (FICO scores range from 300 to 850), you’ll enjoy the best mortgage offers and interest rates. The lower your rate, the cheaper your house payments will be.
To see how much money a stronger credit score could save you, plug your numbers into this calculator at myFICO.com. You’ll also see the score ranges — 660-679, for example.
Suppose someone with a score between 760 and 850 gets a 30-year fixed-rate mortgage for $300,000 at 3.3 percent APR (annual percentage rate). The monthly payment will be $1,319 a month. (Interest rates change daily; watch current rates here).
Homebuyers with lower scores can’t get that great rate. With a score in the 620-639 range, you might pay about 4.9 percent. That’s a $1,596 monthly payment — $277 more each month.
2. Meet with lenders
Now you’re ready to meet with a mortgage lender or broker — or several — to ask for advice on how to boost your credit score. These early chats also prepare you for mortgage shopping, letting you see and compare lenders’ styles, knowledge and helpfulness.
Ask them what documents you’ll need to submit when you apply. Federal mortgage rules that went into effect in 2014 protect consumers better but they also make it a bit harder to get a mortgage — all a response to the subprime lending crisis. You’ll be judged on eight points:
- Income and assets
- Child support or alimony obligations
- Credit history
- Monthly payments on debts
- What you can afford to pay monthly on a mortgage
- Other mortgage costs, like home and mortgage insurance and property taxes
- Your remaining income
For the best rates, all of your monthly payments must be less than 36 percent of your pretax monthly income, although FHA loans may accept total debt payments up to 43 percent of your income.
3. Pull your credit score
Now we’re talking about your actual credit score. As we said above, it’s different from your credit report. Even if you’re not ready to make a purchase, you’ll want to watch your score to monitor your progress improving it.
MyFICO charges $29.95 a month to provide your FICO score and credit reports. Although many competitor scores exist, the FICO (Fair Isaac Corporation) score is the one most widely used in lending and banking.
But why pay when you can get your score for free? That used to be difficult but, thanks to pressure by the federal Consumer Financial Protection Bureau, many avenues now exist to access your FICO score without paying a dime. Learn how to get your score for free here: Hallelujah! 5 Ways to Get Your FICO Score for Free.