If you're thinking of buying a house or refinancing a home loan, these tips could save you thousands of dollars.
Interest rates remain near historic lows, but that may start to change before long. Meanwhile, as the cost of rental homes pushes into the stratosphere, it’s worth considering whether it’s time to get into the real estate market instead of renting.
If you’re thinking of buying a house or refinancing your existing mortgage, these golden rules can save you thousands of dollars as well as heartache.
1. Check your credit reports early
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.
Check your credit reports for problems or errors. This won’t give you your credit scores — which is golden rule No. 3 — but the information in your credit reports is the basis for your scores. 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 Scores, which range from 300 to 850. With a score of at least 760, you’ll enjoy the best mortgage offers and interest rates. The lower your interest rate, the cheaper your mortgage payments will be.
For example, with a $300,000 fixed-rate mortgage, having a credit score in the highest range compared with the lowest range could save you more than $100,000 in interest payments over the life of the loan, according to FICO’s Loan Savings Calculator. You can use the calculator to see how much money a stronger credit score could save you.
Note that interest rates change daily. For current rates, check our mortgage search tool.
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 can also make it a bit harder to get a mortgage — all a response to the subprime lending crisis.
3. Check your credit score
Now we’re talking about your credit score rather than your credit reports. Even if you’re not ready to make a purchase, you’ll want to watch your score to monitor your progress improving it.
Although many competitor scores exist, FICO Scores — designed by Fair Isaac Corp., or FICO — are most widely used in lending and banking.
Many avenues now exist to access your credit scores without paying a dime. Start here:
4. Beef up your score
There’s plenty you can do to quickly raise a low credit score. See “Boost Your Credit Score Fast With These 7 Moves.”
Making an effort to raise your score matters, especially if your score is near the top or bottom of a credit score range.
For example, with a score of 745, you’re near the top of the 700-759 range. With effort, you might gain enough points to move into the highest category, 760-850, giving you access to lower interest rates.
Or suppose your score is 766. Credit scores bounce around all the time; you don’t want yours dropping below 760, which puts you in the less desirable 700-759 category. Try to boost your score at least into the middle of the 760-850 range.
5. First the mortgage, then the house
You’re probably itching to start shopping for a home. That’s fun, but keep your head on straight. Shop for the mortgage first. Looking for a home often gets emotions and fantasies all fired up, tempting shoppers to spend more than they can afford.
Don’t let emotions hijack your home purchase, causing you to overpay or stretch beyond your means. Take into account the mortgage payment as well as other recurring expenses of homeownership, such as taxes, insurance, homeowner association fees and maintenance.
6.Get preapproved (versus pre-qualified)
Getting pre-qualified for a loan usually involves a lender getting a cursory view of your assets and income. It can even be done by phone or over the internet.
As a result, it merely indicates the amount for which you are likely to be approved — after a thorough verification of your financials.
A preapproval, by contrast, requires a thorough investigation by the lender. As Investopedia describes the preapproval process:
You’ll complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. … From this, the lender can tell you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock in a specific rate.
By preapproving your loan, the bank provides a conditional commitment to lend you up to a specified amount. That can impress sellers and help you when you’re competing with other buyers for a home.
Now that you know what you can afford to pay for a home, you can finally start shopping. For guidance, check out:
8. Hold off applying for any new credit
Applying for new credit is tricky. It can help improve your credit score in the long term. But if you open a new credit card or take out another loan too near the time of your mortgage application, your credit score could dip and affect your interest rate.
However, applying for mortgages won’t have much impact. FICO says:
Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Also, checking your own credit score or reports will not have an adverse impact.
9. Hold off on big purchases
Buying a car or any substantial purchase outside your regular monthly expenses could kill your mortgage loan. Before your loan closes, a lender makes a final credit check. New debts could change your eligibility.
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