Tips on scoring the best rate on a home loan

Mortgage interest rates have hovered near historic lows in recent years, but change may be on the horizon.

The Federal Reserve is considering increasing the short-term interest rate it controls as early as June. That could send mortgage rates moving higher again.

For now, rates remain homebuyer-friendly. The national average rate for a 30-year, fixed mortgage fell to 3.75 percent recently. It was 4.28 percent a year ago.

That’s good news for homebuyers, who despite signs that the economy is recovering, are always looking for ways to save.

Still, landing the most affordable mortgage depends on more than getting the lowest rate. The rate borrowers qualify for hinges on several factors, including their finances, credit score and the size of the down payment they’re prepared to make. And the type of loan and the fees that come with it also determine the overall cost of a mortgage.

“As rates go up it will affect affordability,” said Greg McBride, chief financial analyst at Bankrate.com. “But rate is not going to be your only loan consideration. You don’t buy a house because of low interest rates any more than you get married because of a sale at the bridal shop.”

Here are some tips on how to get the best deal on a mortgage:

Size up your credit: Mortgage lenders consider three key factors to determine what rate they can offer a borrower: Good credit, proof of income and size of the down payment. Strength in one category can offset a deficiency in another, but having a FICO score of 740 or better out of 850 will generally qualify borrowers for the lowest mortgage rate.

You can qualify for a home loan with a lower credit score, but you’ll pay a higher interest rate.

If your FICO is below 740, review copies of your credit files for errors that may be weighing down your score. Consumers are entitled to a free credit report every 12 months from the three major credit-reporting firms — Equifax, TransUnion and Experian. Go to Annualcreditreport.com.

The credit firms are required to respond to error disputes within 30 days, so it pays to do this well in advance of when you intend to buy a home. Think at least six to eight weeks.

The ratio between available credit and how much debt you’re carrying is another key element of the FICO score. A good rule of thumb is to keep debt at less than half of your available credit. Reducing that ratio alone can often bump up your score.

Shop around: Before you begin your home search, ask a lender to assess how much you can borrow. The lender will conduct a thorough credit and income review and issue you a pre-approval letter, which will give a seller solid indication of what you can spend.

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