Tips to save you $50k on your next home loan

Ready to apply for a home loan? Here's the one piece of advice that can save you tens of thousands of dollars on your mortgage, plus six more tips to help you get the best mortgage deal you possibly can.
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The best advice: Pull your credit history

Before you apply for a mortgage, pull your credit history and get your credit score. Why? Cleaning up your credit history and raising your score can make you eligible for the best interest rates on a mortgage. You'll want to do this as soon as possible - giving yourself a year to improve your credit.

Borrowers with scores above 720 get the best mortgage rates. They are welcomed with open arms by lenders. If your score is below 720 you can still get a mortgage. But it's more difficult. And it'll cost you more. 

*Source: MyFICO; **Annual percentage rate

In this chart, you'd pay $195 a month less with a 760 credit score than with a 639 credit score. That's a difference of nearly $70,000 over the total life of your mortgage.

Don't worry that checking your credit report might bring down your credit score. Personal inquiries won't do that.

Some credit report services charge a fee for a copy of your credit history. But why would you want to pay for it? You can get a free report from each of the three major credit bureaus - Experian, TransUnion and Equifax - at AnnualCreditReport.com, a federally mandated site.

This step-by-step guide tells what to expect when you apply.

What's next? Here are six tips to ensure you'll get a better rate on your mortgage:

1. Fix any errors on your credit report

Comb each credit report for errors and negative items. Don't be surprised if each report shows different items and has unique errors.

Is checking worth it? Decide for yourself. A study released this year by the Federal Trade Commission found that 26 percent of 1,001 randomly selected consumers who reviewed their credit reports reported a "material error" - something that affected their credit scores. For 5 percent of participants, the mistake put them in a greater credit risk tier, which could result in higher interest and insurance rates.

Fix any errors you find. You can complain at the credit bureau's website or send a letter. There's detailed information on the dispute process at this page of the FTC website. (See: "Ask Stacy: Can I Repair My Own Credit?")

If your issue with your credit report is not resolved to your satisfaction, you can file a complaint with the Consumer Financial Protection Bureau.

2. Pull your credit score, too

Don't stop there. Get your credit score, too.

A one-time look at your credit score costs $19.95 at MyFICO.com. The cost isn't the only problem. There's no guarantee the score you're being sold  is calculated the same way as the score that will be sold to your lender, when you eventually apply for a loan. A Consumer Financial Protection Bureau study found that in 19 percent to 24 percent of cases, consumer scores differed from lender scores sufficiently to land the consumer in an entirely different credit category.

An alternative is to use one of the sources of free credit scores like Credit Karma and Credit.com . Your purpose is to get an idea of what your score is and what you need to do to improve it.

3. Pay down debt

One of the factors in your credit score is your "utilization ratio." That's the amount you owe on credit cards vs. your available credit. For example, if the credit limit on your Visa is $1,500 and your card balance is $900, you're using 60 percent of your credit limit.

At any time, it's wise to use less than 30 percent of your available credit. That means, if your limit is $1,500, keep your balance below $450. Note: We're not suggesting you carry a balance from month to month. That would require you to pay interest. Rather, charge no more than $450 before you pay it off. (See: "3 Tips to Raise Your Credit Score - Fast.")

Now, if you're going to buy a house, improve your score even more by paying off that credit card debt. MyFICO recommends:

Reduce the amount of debt you owe. This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards.

Then come up with a plan to retire that debt.

There's another reason to reduce what you owe. Your mortgage lender will also be looking at your debt-to-income ratio - how much debt you are carrying compared with your monthly income. This number will affect whether you qualify for a loan and what your interest rate will be.

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4.  Keep old accounts open

You'll be tempted, as you clean up your credit, to close old accounts you no longer use. Don't do it. At least not before applying for a mortgage.

The reason: Part of your credit score is based on the length of your credit history. Even if you have to pay an annual fee to keep your oldest account open, do it until that mortgage is securely in hand.

5. Pay your bills on time

This is a hard one for many people. It can seem crazy, to be sure. You may think, "I was late on one or two payments but what does it really hurt since I paid the late charge and got back on track?" But it does hurt you. Just one late payment can bring down your credit score.

Play by the rules when it comes to paying credit cards and other bills, even if the rules seem silly to you.

6. Avoid new credit

Don't apply for any new credit - even a simple store credit card - before you apply for a mortgage. The reason: Opening a new account or even giving a company permission to look at your credit history might lower your credit score. MyFICO says:

In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score. ... Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk.

Of course you'll need to apply for credit when you shop for a mortgage, but FICO treats those inquiries about your credit history differently. They will have no or very limited impact on your credit score, as myFICO explains here.

Have you applied for a home loan or refinance recently? What was your experience like? Tell us by posting a comment below or on our Facebook page.