Ed note: Interest is a tricky thing. The difference between a loan with 4% interest and 5% interest sounds so small, but it can mean big dollars over many years. Here are some tips from Credit Karma for making sure you’re able to keep that interest number as low as possible when you buy a house. Leer en Español.
Ready to buy a home? One of the best things you can do is to make sure your credit is in the best shape possible.
Consider two people in similar situations – they both want a $250,000 mortgage and have the same amount saved up for a down payment. The only difference is their credit scores.
One person has a score of 760 and is offered an interest rate of 3.5%*. The other has a score of 620 and is offered an interest rate of over 5%, costing him an extra $83,000.
These numbers paint a stark picture – every fraction you can get off your mortgage’s interest rate can translate into major savings, so it’d be prudent to work on your credit well before you apply. Here are a few steps to take in the months leading to your application:
1. Check your credit score.
It’s best to know what your score is before you apply so you can know what to expect. Many services allow you to check your credit for free, so no excuses!
2. Dispute errors on your credit reports.
In 2013, an FTC study found that 5% of consumers had errors on one of their major credit reports that could lead to them paying more for loans. Don’t let this happen to you!
In order to ensure that your credit score accurately represents your credit history, look at each credit report and dispute any errors you find.
3. Pay off delinquent accounts.
Outstanding delinquencies could hurt your chances of being approved for a mortgage. Consider paying off any delinquencies before you apply, and if possible, lessen the impact of those delinquencies with months (or years) of timely payments first.
4. Reduce your debt-to-income ratio.
Your mortgage underwriter may question whether you’ll be able to make your payments on time if you’re spending almost as much as you’re making, which is what your debt-to-income ratio measures. If you have any outstanding credit card balances, determine whether you are in position to pay them down or completely pay off the balance. This could help twofold, as it should lower both your debt-to-income ratio and your credit card utilization rate (the amount of available credit you are using), which could in turn improve your credit health.
5. Practice caution when applying for more credit.
When you apply for a credit card or a loan, it produces a hard inquiry that could hurt your score, and a difference of just a few points could raise your interest rate and cost you more money. Try to hold off on applying for new forms of credit until your mortgage is secured.
6. Do your research.
Do you want a 15-year mortgage or 30? Adjustable or fixed? How much can you really afford? Do as much research about the home-buying process as you can, comparing terms, rates and brokers before you commit to anything.
Bottom Line
Your home will probably be one of the biggest purchases you’ll ever make. Increase your chances of saving money on interest by proactively preparing your credit history. The time and effort you put into improving your credit health should be well worth the savings!
*Numbers are for illustrative purposes only. Interest rates can vary and are ultimately decided by lenders.
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