8 smart moves to get the best mortgage

House on sheet of bills

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Finding a mortgage with the lowest possible interest rate, fees and closing costs can save you thousands of dollars.

All it takes is a little planning, plus some knowledge about the application process.

These 8 smart moves can help you land the best possible home loan:

Smart move 1. Check and fix your credit reports.

A good credit score can lead the way to lower mortgage rates and more choices for loans. Lenders offer the best rates to borrowers with credit scores higher than 760.

The Fair Isaac Corporation calculates your FICO credit score based on the information in your credit reports from the three major credit bureaus. Its web site includes a table that shows how credit scores affect mortgage rates.

Credit reports often include wrong or outdated information about your credit or payment history and those errors could lower your credit score.

That's why you should check the information kept by all three of the major credit-reporting bureaus before you apply for a loan.

To get a free credit report from Experian, TransUnion and Equifax, go to annualcreditreport.com.

Each report shows how to correct mistakes or submit an explanation for legitimate black marks that appear on the report.

Smart move 2. Shop around for the best mortgage rate.

You've probably spent months looking for the perfect home, so why not spend a few hours looking for the cheapest possible mortgage?

Lenders offer a surprisingly wide range of rates and fees. Finding the right loan can reduce your payments by hundreds of dollars a month and save hundreds or even thousands of dollars on up-front fees.

Our database of the best mortgage rates from scores of lenders can help you get a sense of what loans cost now.

Smart move 3. Be realistic about how much home you can afford.

It's easy to underestimate the cost of owning a home.

In addition to your mortgage payment, you'll be paying for property taxes, homeowners insurance, utilities, maintenance costs and possibly condo or association fees.

Use this mortgage calculator to determine how much you can afford to borrow based on your monthly income and expenses.

Add that to the amount you've set aside for a down payment and you'll know how much you can spend on a home.

Smart move 4. Get preapproved for a mortgage.

Banks and mortgage companies reject about half of all borrowers because they don't meet stricter demands for better credit scores, higher incomes and fewer debts.

Asking to be preapproved for a mortgage is a way to find out where you stand.

You fill out an application that asks how much you make, how much you've saved and how much you owe on everything from cars to school loans to credit cards.

The lender evaluates that info, checks your credit reports and credit scores, and replies with a letter that says you can qualify for a mortgage and how much it's willing to loan.

The process is usually free, and being preapproved boosts your credibility with real estate agents and sellers who don't want to waste their time on buyers who may not be able to get financing.

Here's our step-by-step advice on how to get preapproved.

Smart move 5. Apply for an FHA loan if you can't qualify for a conventional mortgage.

Getting the Federal Housing Administration to guarantee your loan can be a boon for buyers having a tough time obtaining a mortgage.

You can obtain an FHA loan even if you have a smaller down payment, lower credit scores and more debt than banks and mortgage companies usually demand.

Rules have changed so you can borrow more money with an FHA loan than in the past.

Here's where to learn more about FHA loans and what they can do for you.

Smart move 6. Negotiate your mortgage fees.

Mortgages come with a bewildering and expensive array of expenses: origination fees, administrative fees, title insurance, settlement charges and so on.

You can save big by negotiating reduced fees with your lender or asking the seller to pay some of them for you.

Smart move 7. Decide whether it pays to buy down your interest rate.

Paying discount points on your mortgage is like prepaying part of the interest on your loan. You pay money up front in exchange for a lower interest rate for the life of the loan.

One point is equal to 1% of your loan. So if you're borrowing $150,000, a point would cost $1,500.

Each point you buy will knock one-eighth to one-quarter of a percentage point off your mortgage rate, which is less than points would buy a few years ago.

Buying down your interest rate makes sense only if you have extra cash available and you're likely to stay in your home long enough to recoup the up-front cost.

As an example, say you want to borrow $300,000. Pay $3,000 up front, and your interest rate may drop from 5% to 4.75%, for a savings of about $45 a month. You'll have to own your home for 66 months to make up your initial cost.

If the rate falls to only 4.875%, it will save you about $23 per month and take almost 11 years to break-even.

Our mortgage points calculator allows you to decide whether you're better off paying points to lower your interest rate or adding that money to your down payment.

Smart move 8. Ask the sellers to pay your mortgage discount points.

One way to lower the cost of your loan at no cost to yourself is to ask the sellers to pay the points on your mortgage.

You get a lower monthly payment and need less income to qualify for the mortgage.

Paying your points can also cost sellers less than reducing the price of their home.

"A seller buy down is a great way to solve a price standoff between buyer and seller during the counter-offer phase," says Greg Long, a sales manager for FirstCal Mortgage Co. "Buying down the mortgage rate helps the buyer afford the mortgage without requiring the seller to negotiate a significantly lower price."

Say you want to buy a $375,000 home with 20% down. A $300,000 30-year, fixed-rate mortgage at 5% means a monthly payment of $1,610 and you'll need annual income of $69,000 to qualify for the loan.

A 5% sales price reduction costs the seller $18,750. The loan amount drops to $285,000, which decreases your monthly payment to $1,530. You need $65,568 to qualify and save $80 each month on your payment.

Paying three discount points on your mortgage costs the seller only $12,000. Your loan amount is still $300,000, but your rate could drop to 4.25%. Now you need an income of $63,249 to qualify and your monthly payment is $1,475, a savings of $135 from the original deal.

One final advantage: The buyer gets to deduct the interest the seller is paying from his or her taxes.

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