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Improve Your Credit Score to Take Out New Mortgage Loans

The credit crunch has decreased applications for mortgage loans and made lenders skittish about approving new loans. Many people, both homeowners who want to refinance and new borrowers who want to buy their first house, think credit is so tight that there is no point to refinancing or to applying for a new mortgage loan. However, they may be missing out on a great opportunity. Now may be an excellent time to refinance or apply for a new mortgage.

Why? The Fed has drastically cut interest rates to stimulate economic growth, leading to substantially lower mortgage loans' interest rates. That can be excellent news for you, leading to much lower monthly payments and a lower overall cost for mortgage loans. If interest rates have dropped at least two percentage points between when you signed your mortgage and today, then now is the time to refinance and lock in a lower interest rate.

But aren't banks leery of giving out new mortgage loans? Yes and no. The deciding factor is the applicant's credit rating. Banks are more wary than they have been about offering loans to borrowers with a poor credit rating, and they are using more stringent guidelines for deciding what constitutes a poor rating, but they are eager to draw in new lenders with good credit ratings. Get a free credit report and discover what your credit rating is, and if it is good, then apply for a mortgage right away.

If your credit is marginal, there are a few steps you can take to improve it within the next six months. Pay all your bills on time scrupulously, putting them on automatic withdrawal if you can. Because banks look at the ratio of credit available to you compared to credit you have used, pay down your credit cards and existing loans as far as you can. Ignore old advice to close down unused credit card accounts; leaving the accounts open increases the amount of credit available to you, improving your ratio of available credit to used credit. Be especially wary of closing very old accounts, since doing so could shorten your credit history, which you want to be as long as possible. If you take these steps, maintain your payments successfully for several months, and avoid taking on new credit card debt, in months your score should be markedly better.

As you can see, a credit crunch can be an ideal time to apply for new credit and new mortgage loans. Interest rates are dropping, so if you are the responsible credit user the banks want to lend to, negotiating new mortgage loans right now can lead to a much lower interest rate and substantial savings for you. Even a tight economy can turn to your advantage.