With mortgage interest rates hovering near record lows, you may want to either refinance your mortgage or purchase a new home before rates go higher again.
The question is -- can you qualify for refinancing or a purchase loan?
Since the recession, lenders have tightened loan qualification standards and their most widely used tool to determine if you qualify for a loan and at what interest rate are your credit scores. Credit scores are determined by a software algorithm that analyzes your credit and payment history.
These "FICO" scores run between 300 and 850, with the highest numbers considered to be the best scores. The 47% of Americans with credit scores of 720 or higher receive the best interest rates, according to MyFICO.com.
Credit scores make a significant impact. For every 20-point credit score increase, according to Zillow, the average low APR declines 0.12 percent, a savings of $6,400 on a $300,000 home over 30 years.
Improve your credit scores
FICO scores are based on your credit history. Each credit reporting bureau, Experian, TransUnion, and Equifax calculates its own score, so you may have three scores.
The first thing you need to do is review your credit reports for errors and get them resolved as quickly as possible. Visit freeannualcreditreport.com to get copies. You can then purchase your credit scores for approximately $14.95 from each agency or all three at myfico.com.
FICO scores change with every new piece of information that comes into the credit reporting bureau, so the credit score you receive today can be improved quickly by following some dos and don'ts.
Don't close credit card accounts. FICO scores utilize a credit utilization ratio that turns against you because it appears that you might be overusing your available credit.
Don't max out or consolidate credit cards. Credit card companies like it if you only use about 30% of your available credit on your card. You're better off having small balances on multiple cards than a large balance on one card.
Don't apply for new revolving credit or transfer balances. If you're buying a new home, it's tempting to buy some new furniture, but don't open that account until after your loan closes. You don't want "inquiries" to be raised in the scoring algorithm.
Don't change jobs right before you apply for a home loan, although job changes within the same field are considered more favorably in scoring.
Do pay all bills on time and with at least the minimum payment due. Lenders like on time payment histories.
Do pay down your debt, as lower income-to-debt ratios are attractive to lenders. Start by reducing credit card balances first, beginning with the balances that generate the highest interest rates. Revolving credit is considered riskier debt than installment loans such as student loans or car payments.
Do shop lenders simultaneously. Credit score software takes into account several inquiries from mortgage lenders as normal, but if you space rate-shopping out over weeks or months, that could impact your credit score negatively.
Remember, mortgage lenders are most interested in your ability to repay their loan. The most important factors are job and debt payment history. Job security -- long-term employment in the same field and on-time