Home Loan Basics For Getting Lower Interest Rates

Are you interested in becoming a home owner in the Bay Area? The road to owning a primary residence or an investment property in San Francisco bay is waiting for you. But there are ways to prepare your credit ahead of your mortgage loan application that can put you in a position to pay less for the mortgage over the lifetime of the loan.

Do you know how to prepare your credit to qualify for the lowest interest rates available to you?

It is definitely possible to do this, but financial advisors and finance publications such as Investopedia advise you to start working on your credit early; it can take up to six months before you start seeing results that can potentially earn you a lower mortgage rate.

Low Interest Rates = Savings

A home loan with a low interest rate is desirable because it saves the borrower money over the lifetime of the mortgage; the lower your interest rate, the less you will pay over the lifetime of at 15-year or 30-year mortgage loan. 

But when you apply for a home loan, regardless of whether it’s a conventional mortgage, FHA home loan, VA mortgage benefit, or any other type, the interest rate the lender offers is tied to your credit score.

Home Loan Credit Score Requirements: What You Need To Know

Credit score requirements vary from lender to lender, but regardless of the actual numbers, the lender will have a range of FICO scores that qualify for maximum financing with the lowest down payment possible for the type of loan you need as well as the lowest mortgage rate possible. Another range of scores below that will qualify for the loan as good credit risks, but with higher rates.

Yet another range of FICO scores below the second range may still qualify for a home loan with higher interest rates and larger down payment requirements.

So how does a house hunter, even an experienced homeowner with good credit overall improve those scores to qualify for lower interest rates?

If you need a home in Martinez, Concord, Pleasant Hill, Alamo, Danville, San Ramon, or any other California location, you’ll naturally want the most affordable loan possible, and lowering your FICO scores is one way to get closer to that goal.

And we aren’t talking about paying a fly-by-night third party to “improve your credit”. There are steps you can take on your own without paying a dime to someone else that will help raise your FICO scores.

Simple Methods To Improve Your Credit Score

According to Forbes, your payment history makes up approximately 35% of your credit score. That is a big portion considering that the overall duration of your credit history counts for 15% and the way you use your credit adds up to 30%.

When You Pay Your Bills Counts

So it’s best to start improving your FICO scores by concentrating on your payment habits. Before you apply to be approved for a mortgage to buy your Bay Area home, you should establish a payment history that has no late or missed payments for at least a full 12 months prior to the loan.

This does two things. One is that it improves your overall credit score, and your payment record as mentioned above is a full 30% of the factors used to establish your scores.

But this 12 months of on-time payments also helps the lender justify approving the loan-coming to the process with late or missed payments in the 12 months prior makes it much harder for the lender to view you as a good credit risk.

The Credit Utilization Ratio

How you utilize your credit makes up another 30% of your FICO score. The credit utilization ratio is a formula your loan officer uses to determine what percentage of your available credit you use each month. This is based on your balances and credit limits.

Lowering your credit card balances improves your FICO scores. You want to work on lowering your balances below the 50% mark-carrying balances more than halfway toward your credit limit is not a good indicator for the lender.

30% Of Your Credit Limit Is Best

Ideally you want to reduce your balances so that your overall credit utilization ratio is at or near 30%. You can figure out the percentage you currently have by adding all your credit card balances together and dividing by the total credit limit for all your cards together.

Having maxed-out credit cards at loan application time is a bad move; it’s best to wait until you have improved your credit card balances before applying for a new loan. Keep your balances as low as possible for best results.

Don’t Apply For New Credit In The Meantime

Opening new credit lines ahead of a mortgage loan application makes it harder for the loan officer to justify approving your mortgage. Your potential debt on the new credit line may work against you-the lender needs to know you can afford the loan tomorrow, next month, next year, etc. Do you need to add more potential debt to your credit picture before you get your mortgage loan?

Plan carefully to avoid this mistake-many make it, often with auto loans in the 12 months prior to the mortgage application. By timing such applications with your mortgage in mind, you get much closer to a lower interest rate and mortgage approval.