Six Ways to Get a Better Mortgage Rate

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Unless you have pristine credit, it's no longer a sure thing that you'll snag a decent interest rate on a mortgage -- or even qualify at all, for that matter.

But before you sign another year's lease on your rental, take note: There are steps you can take to help make yourself better mortgage material in a matter of months, says Gibran Nicholas, CEO of the CMPS Institute, a training and certifying group for mortgage brokers in Ann Arbor, Mich.

Generally, lenders want to see borrowers with credit scores of at least 660 and debt levels at less than 40% of income.

Pay Off Certain Debts First

Raising your credit score isn't just a matter of chipping away at debt and paying bills on time. You can strategize: If you pay off certain debts before others, you may increase your score faster.

Focus on paying off credit cards with the highest balance relative to credit limit, rather than those with the highest balance in absolute terms, Nicholas says.

For example, if you pay down a $7,000 balance on a card with a $10,000 limit, that will bump up your credit score far more than if you pay down a $10,000 balance on a card with a $20,000 limit, he says.

Shuffle Your Debt

If you don't have the extra cash to pay down debt, consider transferring balances between credit cards so that each card has a lower ratio of debt to credit limit, says Janet Guilbault, a mortgage specialist in San Francisco, Calif.

Say you owe $6,000 on a credit card with a $10,000 credit limit, and only $500 on a second card with a $10,000 limit. If you transfer half of the $6,000 debt to the second card, your credit score may benefit, she says.

Raise Credit Limits, With Care

Because credit scores are partly based on how high your credit card debt is relative to your credit limit, you may benefit by asking your credit card company to increase your credit line.

Make sure, however, that the company agrees not to pull your credit report. Credit scores are negatively impacted when reports are pulled.

Also be sure you have the discipline to handle a higher credit limit. If you have a lousy record using plastic, leave your lower limit in place.

Ride on Someone's Good Credit

Another strategy is to ask a parent or relative with excellent credit to add you to his or her account as an authorized user.

"Their good record can improve your credit score," Nicholas says, adding that this is an unintended effect that the industry is trying to prevent. "But so far, it still works."

Tweak Your Debt-to-Income Ratio

If your debt is over the 40% limit, consider taking out a bigger mortgage and using the excess loan to pay off a chunk of your debt at closing.

Say you owe $4,000 on a car loan, and you want to borrow $300,000 to buy a house. Consider a deal in which you borrow $304,000 and, at the closing, pay off your car loan. If, in doing so, your debt is squashed to 40% or less of your income.

Of course, you'll need to discuss this with your mortgage lender. The lender would agree to the strategy in advance and understand that your debt to income ratio would be lowered at the closing.

Consider, of course, that you may be turning a $4,000 short-term car loan into a 30-year loan. "But if it's the only way to qualify for a mortgage, it may be worth it," Nicholas says.

Postpone Paying Off Old Accounts

If you have an old, unpaid account being handled by a collection agency, your impulse may be to pay it off before applying for a mortgage.

"But don't," Nicholas says. "This is counterintuitive, but if you pay off an old account, you will lower your credit score."

The software used to quantify credit scores doesn't take into account the fact that you paid off the account. "It notes that there was recent activity on the old account, and that has a negative impact," Nicholas says. "It's a quirk in the system."

Normally it takes a month or two before any changes you make are reflected in your credit score. You can, however, pay for what is called a "rapid rescore." You pay between $30 and $50 per item that is changed on your credit report, multiplied by three (there are three credit agencies), and get a new credit report within a week.

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