mortgage

How credit scores impact your mortgage rate

How to clean up your credit

Whether you believe your credit report to be pristine and unmarred by financial indiscretions, the ideal time to check it out for yourself is up to a year before buying a home.

Go to AnnualCreditReport.com to get your yearly free credit reports from Experian, TransUnion and Equifax. Make sure you get reports from all three. The information they contain can vary wildly.

The credit reporting agencies do charge a fee if you want to know your credit score. Lenders look at all three scores and use the middle one, according to Hackett.

Consumers should be on the lookout for any information that doesn't belong on their credit report or that is incorrect. In 2007, a survey by Zogby found that 37 percent of consumers find errors when they check their credit reports.

Scour everything from the way your name is spelled and previous addresses to checking that each and every account is yours and reported correctly.

"Sometimes people will quickly glance over their information and that's it. But you should take the time and look at the account numbers," says Steve Katz, consumer communications director for zendough.com, the consumer personal finance site by TransUnion.

If the account is closed, make sure that is accurately reflected on the credit report.

Dispute any errors you find. All three credit bureaus make it very easy to begin the process with online systems.

If everything is correct, pay down balances and let time do the rest.

What else you can do

If you're thinking of buying a home in the near future, try not to apply for new credit. Though it's not always avoidable -- for instance, if you need a car loan or college financing -- you should resist opening several new lines of credit at once.

"A couple in a year is fine. Four or five in a year will start to have an impact. The best way to think of it is that you don't want to appear credit hungry, so you don't want to apply for a lot in a short period of time," says Katz.

If you've done all you can to hike up your score and still are not happy with the interest rate lenders offer, you may be able to buy down your rate.

For homeowners planning to stay in their home for a long time -- five years or more -- it can be well worth the savings.

The typical range is 1 percent to 3 percent of the home loan amount, expressed as percentage points.

"What you're doing is paying upfront, prepaid interest to the bank and in exchange they're willing to give you a lower interest rate," Spagnuolo says.

Another way to get a premium interest rate is with a big down payment. Understandably, banks feel less jittery about your prospects of defaulting on the loan with a down payment of 25 percent or more.

"The down payment is the second most important criteria after your credit score because that is one of the mechanisms the bank uses to gauge how risky the loan is," says Spagnuolo.

"If you put down 40 percent, a lot of the banks will give preferred interest rates for that," he says.

Transforming your credit report won't happen overnight, but with time and consistency anyone can get to the elite levels of mortgage pricing and save a ton of money in the long run.

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