Key steps to getting the best home loan
Start with being on top of your credit report and credit score.

By LESLEY MITCHELL

The Salt Lake Tribune

Published: May 12, 2012 03:56PM
Updated: August 28, 2012 11:33PM
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Gene J. Puskar | The Associated Press

Thinking of buying a new home anytime soon? You better know your score — your credit score, that is.

Now, more than ever, that three-digit number affects what you’ll pay to finance your home purchase. The higher your score, the lower the mortgage rate — and monthly payment — you’ll pay.

For example, at today’s rates, if you have a credit score of at least 760 and qualify for a mortgage of 3.5 percent, you’ll pay about $1,340 per month on a $300,000 loan. The same borrower with a credit score of 620 to 639 would pay a rate of around 5 percent, or more than $1,600 per month, according to credit-scoring company Fair Isaac.

With the tighter loan criteria lenders have put in place in the past several years, you could end up paying a higher interest rate, even if your credit score is only a few points below a particular threshold.

But if you’re like most people, you don’t know your credit score. Some people order their credit report but neglect to order their score before applying for a home loan. Or they order a credit score from the wrong source — one that isn’t anywhere near accurate.

Either way, mortgage lenders say many borrowers are often surprised at their credit score when they try to get prequalified to buy a home. And not always in a good way.

Here’s a step-by-step plan for avoiding a nasty surprise and helping ensure you get the lowest rate you can get:

Start with ordering your credit report • Get a free copy by going to AnnualCreditReport.com. This site was set up by the nation’s three main credit-reporting agencies — Experian, Equifax and TransUnion — to comply with a federal law requiring them to provide consumers with one free report annually. That means you could go to this site every four months and get a free report from a different bureau. Or you can get all three of your reports at once. You can have your credit report(s) mailed to you or print them.

Fix any errors • Comb through your reports and look for incorrect information. Many consumers who haven’t ordered their credit reports in awhile find errors, some of which contain negative information that could lower your credit score. Immediately dispute any erroneous information.

Order your credit score from MyFico.com • Although credit reports are free, you’ll have to pay for your credit score, a three-digit number that reflects the quality of your credit. The problem is that your credit score varies based on which credit company is figuring it. Lenders such as Al Bingham, author of The Road to 850, a book about credit scores, believes the most accurate source may be from Fair Isaac & Co. That’s because Fair Isaac figures scores based on information from Equifax and TransUnion. (Experian will not provide information to Fair Isaac.) Fair Isaac will provide your score, along with an explanation of what went into the number so you can get an idea of your weakest areas.

Scores ordered individually from Equifax, Experian and TransUnion may be off by quite a bit because they use information only from their own bureau.

You can order your score from the credit-scoring company at MyFico.com for about $20. For that cost, you’ll get your score and a detailed explanation of what it means to you.

Don’t worry about shopping around • You may have heard that shopping around for a loan can actually lower your credit score if you allow each company to pull up a credit report. If you check the rates and terms of two to three mortgage lenders within a 15-day window, those inquiries should not lower your credit score, Bingham said. Make a number of inquiries over a longer period and you might see an effect.

Don’t go crazy with credit • Mortgage lenders such as Bingham have had clients get preapproved for a home loan, who before the loan closes, have taken out additional credit cards or car loans. Know that your mortgage lender pulls your credit report when you request a prequalification on a home loan and later, right before you close. Taking out additional credit between those two periods could cause a lender to scale back the amount you can borrow.

Lesley Mitchell writes One Cheap Chick in blog form at blogs.sltrib.com/cheap. lesley@sltrib.com Twitter: @cheapchick Facebook.com/OneCheapChick