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Only 40% of Americans Can Get the Good Mortgages

NEW YORK ( TheStreet) -- To get the lowest mortgage rate available, just how good does your credit score have to be?

Try 740 and above out of a possible 850. Unfortunately, that figure, from a study by mortgage-info firm (Z), relegates a lot of would-be borrowers to the sidelines. Zillow says just 40.3% of Americans have such enviable scores. The industry has tightened up -- in 2010, bottom-rate loans required a score of 720, a threshold met by 47% of potential applicants.

Even worse, Zillow figures three in 10 Americans, those with credit scores of 620 or below, are unlikely to qualify for any mortgage at all. Zillow drew these conclusions by looking at 13 million loan quotes and more than 225,000 requests for home-purchase loans on its Mortgage Marketplace in September. The results were compared with a similar study three years earlier.

Despite improvements in the housing market, falling delinquency and foreclosure rates, slightly lower unemployment and other signs of economic improvement, that 30% rejection rate is unchanged since September 2010. Even a high down payment of 15% to 25% won't get these folks a loan.

Getting a less-than-rock-bottom rate can cost you serious money in the long run. In September, applicants with scores of 740 and above got rates averaging 4.42% for conventional 30-year fixed-rate loans. Scores from 620 to 639 qualified applicants for rates averaging 5.09%. There were so few loans approved for applicants below 620 that a meaningful average could not be calculated.

At 4.42%, a $200,000 30-year fixed-rate loan would cost $1,004 a month, with interesting totaling $161,397 over 30 years. At 5.09%, the payment would be $1,085, with total interest at $190,482.

"Your credit score is the single most important factor in determining your mortgage interest rate and monthly payment," said Erin Lantz, director of mortgages at Zillow. "To avoid any surprises when buying a home, check your credit score and report at least six months before you intend to buy to see if there are any costly inaccuracies, pay down high-balance lines of credit and make sure your bills are always paid on time."

After doing, all that, try to save more every month to make a bigger down payment. The smaller your loan compared with the home's value, the better your chances of approval. Of course, you can look for a less expensive home as well.

But what if you can get approval, but for now would be stuck with a higher rate? Would it make sense to postpone your purchase or refinance until you can nudge your credit score higher?

That could be risky. It would be annoying to pay 5% instead of 4.5%, but if you wait six months or a year you might find that those bottom-level rates have gone up. You might end up paying 5% or more even with a score over 740.

No one knows for sure, but most experts agree rates will drift up. They're already up quite substantially since spring, when you could get a 30-year fixed loan for 3.5%.

Also, home prices will probably continue to rise, though perhaps not as fast as during the past year or so. So even if waiting did get you a lower rate than you'd pay today, that saving might be wiped out by a higher purchase price.

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