Three Steps for a Mortgage Rate

Step 1:
Understand and improve your credit
Your credit reports and credit scores are a major part of your mortgage application. A mortgage lender will usually check all three of your credit scores – based upon data from Equifax, Experian, and TransUnion – and use the middle score to calculate your rates. A credit score over 650 will help you get good rates on your mortgage. Having an even higher credit score (750 or above) can lower your rates even more.

If your credit score is below 650, you can try to give it a quick boost by:

* Reducing your credit card balance below 35% of the credit limit
* Keeping your accounts stable
* Making all of your payments on time
* Avoiding unnecessary applications for credit
* Correcting negative inaccuracies.

Checking your credit reports and scores 3-6 months before a mortgage application will ensure that you have enough time to fix any problems you find.

Step 2:
Reduce your debts
Mortgage lenders look at your debt-to-income (DTI) ratio to determine how much you can afford to borrow. This ratio is calculated by dividing your monthly pre-tax income by the amount you use to pay off debts such as auto loans, student loans, and credit card balances each month. Your credit card payments are calculated in this formula as the minimum payment required, not the amount you usually pay each month.

Borrowers with a debt-to-income ratio below 30% will have an easier time getting a good deal on a loan. If your DTI ratio is too high, you should consider paying off some small loans (such as electronics or personal loans) or credit card balances before you apply for a mortgage. Don’t close the credit card accounts when you pay them off, however. Closing credit accounts can damage your credit score. You can also improve your DTI by increasing your income. Usually, this is done by co-signing with a spouse.

Step 3:
Improve you loan-to-value ratio
Your down payment amount is the third key element the interest rate calculation process. In the loan world, your down payment is calculated by looking at your loan-to-value (LTV) ratio. Lenders calculate your LTV ratio by dividing the amount you are asking to borrow by the price of the home you want to buy. If you are buying a house for $100,000 and want a mortgage for $90,000, your loan-to-value ratio is 90%.

Ideally, lenders look for borrowers with an LTV over 80%. However, many borrowers these days only put down a 5% down payment or obtain special financing with a no-down payment loan. It’s especially common for first-time borrowers to buy a home with little or no down payment. If your LTV is below 80%, you will probably be expected to pay private mortgage insurance on your loan. You can improve your LTV ratio by increasing your down payment or choosing a less expensive home to purchase.

These three improvements can help you save big on your home loan. Reducing your interest rate by just one percent can translate into thousands of dollars in savings over the life of the loan. As part of your loan preparation, you can also use Credit.com’s free online mortgage calculators to easily estimate how much you can afford to borrow, what rates you deserve, and what kind of loan is best for you. When you are ready to apply for a loan, you can apply here for no- obligation loan offers from competing lenders online. A home is often the largest purchase people make in their lifetime. Credit.com wants to help you make this important process as easy and as affordable as possible.