All home buyers want the lowest mortgage rate possible when applying for a home loan, because it directly translates to a smaller payment each month. And who doesn’t want to shrink their monthly expenses?

But how does one obtain a low rate on a mortgage loan and, for that matter, why is it important in the first place? These are the subjects we will discuss in this tutorial for first-time home buyers.

How Your Credit Score Relates

When you apply for a home loan, you be sure that the lender will request your credit reports and scores from all three of the reporting companies (Experian, Equifax and TransUnion). Lenders also reserve the best rates for borrowers who fall into a certain credit category.

What score you need to qualify for this category will vary from one lender to another, but it’s safe to say that the better (higher) your credit score, the lower the mortgage rate you’ll receive. This in turn translates into a lower payment each month, which is the whole point to all of this.

Here’s something not many home buyers realize. Over the last few years, the score needed to qualify for the best rates on a loan has risen. This is largely due to tougher restrictions on lending institutions (as a result of the subprime loan crisis of 2007 – 2008).

In fact, I saw Jean Chatzky (financial editor for the Today Show) on TV not long ago, talking about this very subject. She said that in May of 2008, borrowers needed a score of at least 620 to qualify for the best rates. By May 2008, however, that requirement had increased to 760 … an increase of 140 points! Today, in 2010, those higher standards are still in effect.

How You Can Improve Your Score

This is a good time to introduce you to another acronym related to home loans, a term you’ve probably heard before on television. The acronym if FICO (pronounced fie-coh). It stands for Fair Isaac Corporation. This is the company that created the scoring model that is used today. Basically, it’s a computerized scoring model that turns your financial history into a numerical score between 300 and 850 (with higher being better).

So with all things being equal, a higher FICO number means that you’ll be offered a better rate on your loan. That’s because a higher number tells lenders you know how to manage your finances, and that you’re responsible when it comes to paying bills.

You can maintain a good score by paying all of your bills on time. This includes credit card balances, car payments, rent, utilities, etc. It also helps to reduce your overall debt, starting with those credit cards. These are the keys to being a successful home buyer in the new economy.

Citation Note: The original version of this article was written by Brandon Cornett. Brandon is the publisher of the Home Buying Institute, which includes one of the largest libraries of mortgage advice for home buyers.

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