Making these simple moves can mean a huge financial difference when it comes to home loans.
You’ve heard it before, no doubt: A mortgage probably will be the biggest purchase you’ll ever make. Making a few simple, smart moves in the quest for a mortgage can save you tens of thousands — even hundreds of thousands — of dollars over the life of the loan.
Try these nine ways to save — from a little to a lot — on your mortgage purchase:
1. Get your FICO score (free)
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Long before you apply for a mortgage or start home-shopping — as much as a year before — take a look at your credit score. FICO is the score used most in the mortgage industry. (There’s no need to pay to see it: Read “8 Ways to Get Your FICO Score for Free.”)
Raising your score makes you eligible for a better interest rate on a mortgage, and it could take as long as a year to improve that score.
This loan savings calculator, from FICO, the company that invented credit scoring, shows how much you could save by improving your credit score. The calculator shows six ranges of credit scores, from highest (760-850) to lowest (620-639). Alongside the scores are typical mortgage interest rates currently offered to borrowers with those scores.
Here’s how a higher score saves big money. To borrow $300,000, for instance:
- With a credit score in the highest range, you’d pay around 3.264 percent (APR), with a $1,308 monthly payment and total interest paid over the 30-year mortgage of $170,853.
- With a credit score in the lowest range, you’d pay around 4.858 percent (APR), with a $1,585 monthly payment and total interest paid of $270,431.
How’s that for a money-saving difference? Having one of the highest credit scores shaves roughly $277 a month off the mortgage payment compared with a score in the lowest bracket. The total bill for a bottom-rung credit score is nearly $100,000 in extra interest paid over the life of this mortgage.
Try using the calculator yourself to see the savings differences at various credit score ranges. It’ll make you a believer.
2. Raise your credit score
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Improving your credit score is a slow process so, again, it’s good to start long before you need to borrow. “7 Fast Ways to Raise Your Credit Score” tells you how. And these four articles have more help for raising a credit score:
- “8 Credit Score Myths: Fact vs. Fiction”
- “3 Steps to Repairing Your Own Credit”
- “Ask Stacy: Can You Help Me Clean Up My Credit History?”
- “Ask Stacy: Will Paying Old Debts Improve My Credit Score?”
3. Clean up your credit report
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One way to raise a too-low credit score is to repair any errors in your credit reports. The three major credit-reporting agencies (Equifax, TransUnion and Experian) track Americans’ use of credit, compiling credit histories on us all to help lenders and merchants decide whether they should lend us money or credit and at what rate. The information in these reports is the basis for your score. Errors are surprisingly common.
You have the right to one free copy annually of your credit history from each agency. “How to Get Your Free Credit Report in 6 Easy Steps” gives a step-by-step explanation of how to access your credit reports.
Check your credit reports for problems or errors as soon as possible before applying for a mortgage as it takes time to fix them and see improvement in your score.
4. Take a meeting
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It’s not too early, however, to meet with several lenders to discuss your borrowing situation. Just don’t give them permission to pull your credit history yet: Too many inquiries can hurt your credit score, so wait until you’re ready to apply for a loan. Besides, your free credit score will give them a close-enough idea of your score to help you understand how much you will be able to borrow, what you need to do to prepare to apply, and to give you helpful tips on improving your credit score.
Meeting with four, five or even more lenders will help you understand the process and get a feel for which you’d like to work with. Do the same with online lenders. Comparison shopping for lenders can save you a good deal of money as lenders’ mortgage offers can vary widely.
5. Keep your emotions from running the show
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You are of course going to want to start house shopping. In fact, it’s hard not to. And while there’s no reason you can’t keep an eye on the market and see what’s available, try not to start shopping seriously until you’ve got your financing lined up.
Falling head-over-heels in love with a home that you can’t afford and then stretching your finances perilously thin to buy it is one of the worst and most costly financial mistakes you can possibly make. Just ask all the people who lost homes in the recent housing crash because they’d got mortgages they could not afford.
6. Get preapproved for a mortgage
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Lenders will offer to help you become “pre-qualified” for a mortgage. Go for it, if you want to, although there’s no need for it. Just don’t misunderstand: Pre-qualification won’t help you buy a home or get a mortgage. It just means that a lender gave you an estimate of how much you can borrow and at roughly what rate based on information you provided.
Preapproval, however, is a whole different ballgame. Preapproval means that you filled out the application for a mortgage loan, gave the lender permission to pull your credit score, and the lender has agreed to loan you a certain amount of money — conditioned on approving the property you have chosen. A preapproval gives you an advantage when you are shopping for a home. In a competitive market, it may not trump a cash offer but your preapproval letter from your lender lets sellers know that they will not need to wait for you to apply for a mortgage that you may or may not receive. You are already approved and can make the purchase immediately.
Get preapproved when you are ready to shop for homes. Not all lenders issue preapproval letters, but having one can be a nice advantage and may be worth including among your mortgage comparison shopping criteria.
7. Don’t apply for non-mortgage credit
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While you are in the midst of applying for a mortgage and buying a home, take extreme care not to do anything that might affect your credit score. Opening a new credit card or credit account or getting a loan before you have signed on the dotted line for your mortgage could affect your credit score and possibly lower your interest rate. Wait until after you have signed your mortgage papers.
8. Comparison shop for mortgages all you wish
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You are safe, though, making multiple mortgage applications or allowing even numerous mortgage lenders to inquire about your credit score — called a credit “pull”– within a period of 30 days or more. FICO says:
Looking for a mortgage, auto or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan. To compensate for this, FICO Scores ignore mortgage, auto and student loan inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping. In addition, FICO Scores look on your credit report for mortgage, auto and student loan inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.
Also, checking your own credit score or reports will not hurt your credit score.
9. Make no big purchases until your mortgage closes
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The minute you decide on a home you may want to start shopping for furniture and appliances, window coverings and home improvements. Shop all you want, but don’t put any purchased on credit — or apply for new credit — until after your mortgage loan has closed. New purchases affect the amount of credit you have available and can change your eligibility or the cost of your mortgage. So hold off until your mortgage is a totally done deal.
What’s your experience shopping for a mortgage or refinancing? Share with us in comments below or on our Facebook page.