This One Move Could Help You Get a Better Mortgage Rate

This financial move could really pay off if you're buying a home.

If you're getting a home loan, you'll want to do all you can to qualify for the best mortgage rate possible. Rates are currently up from recent record lows so any steps you can take to try to make yourself a more attractive customer can go a long way toward helping you get an affordable home loan, even in the current economic climate.

Fortunately, there's one move that can make a really big impact. It can help you in a few different ways to appear to be a lower-risk borrower who mortgage lenders want to work with.  Here's what it is. 

Take this step to have a much better chance of getting an affordable mortgage

There's one financial move that can have a really big effect on your ability to qualify for an affordable mortgage loan. It's repaying debt that you currently owe. 

Paying back as much as possible of what you owe can be enormously influential in terms of the mortgage rate you are offered because it impacts two key metrics that mortgage lenders look at. It affects:

• Your credit score
• Your debt-to-income ratio

If you repay some or all of your existing loans before applying for a mortgage, this can make a big impact on both of these important criteria. It can open up the door to a broader choice of mortgage lenders so you can more easily shop around for an affordable loan. And it will also lower the rate each of these different lenders offers since you'll be viewed as a lower-risk borrower. 

How repaying debt affects your credit score

Your credit score is a measure of how responsible you've been with the debts you already have. A higher score gets you a better mortgage rate. 

Your credit utilization ratio is a key factor in your score. It refers to the amount of credit you have used, relative to the total amount of credit available to you. A lower ratio results in a higher score. And paying down your debt lowers your ratio. 

If you have a $1,000 line of credit and you owe $500, you have a 50% utilization ratio. This is considered too high so it will hurt your score. If you pay back the $500 and have a 0% utilization ratio, it will make a big positive impact on your credit score -- and thus help you get a cheaper mortgage. 

How repaying debt affects your debt-to-income ratio

Lenders also look at the debt you have relative to your income, which is called your debt-to-income ratio. A lower ratio is considered to be less risky since it means you'll have more of your money available to cover the mortgage payment and other expenses.

Obviously, if you pay down debt, that improves your debt-to-income ratio. It will also encourage more mortgage lenders to give you an affordable loan at a reasonable rate. When combined with an improved credit score, the difference in the rates you're offered could be quite substantial. 

Paying down debt can definitely be a challenge, but since it goes a long way toward improving your efforts to qualify for a mortgage loan, it's definitely worth doing if you can.