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What is the most important factor that determines how much you'll pay for your next home? Many people think good negotiating skills will get them the best deal, while others think that shopping during the off-season is the most important thing. However, there is one factor that can mean more than all of the rest combined -- your credit score.

A higher credit score makes how much difference?
You can get a conventional mortgage with a credit score as low as 620, or an FHA loan with a score even lower than that. However, if you have a mediocre credit score, it may be worth waiting.

First of all, FHA loans require expensive mortgage insurance, which adds significantly to the cost of the loan, both upfront and on a continuous basis. Second, with conventional financing, your credit score can have an enormous impact on your interest rate, and therefore the total cost of your loan.

According to the latest data from FICO, whose credit scoring model is used by more than 90% of lenders, here are the interest rates you can expect for various credit "tiers":

FICO Score

Average mortgage rate (30-year)

760-850

3.525%

700-759

3.747%

680-699

3.924%

660-679

4.138%

640-659

4.568%

620-639

5.114%

Note: rates are current as of 11/2/2015

Let's put these rates into context. Suppose you plan to buy a $250,000 house, and put 20% down, meaning that you'll need a $200,000 mortgage. If you have a top-tier credit score, you can expect to pay $901 per month toward principle and interest, while a borrower in the lowest tier would pay $1,088. This might not sound like a dramatic difference, but the top-tier borrower would pay $67,226 less on their mortgage over the 30-year life of the loan. That's why I say credit is the most effective way to get a great deal.

There is a significant difference among adjacent tiers as well. Let's say that you currently have a 690 credit score and want to buy that same $250,000 home. By improving your score by just 10 points and jumping to the next tier, you can save nearly $7,300 in interest.

You can have an impact in a short time period
It can take several years to have a big impact on your credit score, but you may be surprised at how quickly you can boost your score by a few points and get to the next tier. There are several ways you can do this, including:

  • First, know where you stand. You can obtain a full credit report and FICO score for about $20 from websites such as myFICO.com or Experian (make sure you're buying a real FICO score). Considering how much you could save by boosting your score, the investment is well worth it.
  • Dispute any inaccurate information. According to the FTC, as many as 42 million Americans have errors on their credit reports. If you find one on yours, you can dispute it online with each of the three major credit bureaus (Equifax, Experian, and TransUnion). The bureaus must either verify the information on your report, or remove it within 30 days.
  • Pay down your credit cards. 30% of your FICO score is made up of the amounts you owe on various accounts. More important than the balances themselves is the percentage of your available credit you're using. Therefore, by aggressively paying down your credit cards, you can have a quick impact on this part of your score. Experts generally recommend that you should be using less than 30% of your available credit, but even if you can only afford to pay down a small portion, it could add a few points.
  • Don't apply for any new credit. On your credit report, you'll see a list of your recent "hard" inquiries, which are the times you applied for credit. The scoring formula only takes into account inquiries from the past year, so by simply letting a few inquiries fall off, your score could gain a few points.

The Foolish bottom line
These are a few of the ways you could potentially boost your score by a few points, and move yourself up to the next tier of mortgage rates. However, if you have a mediocre credit score (say, in the 600s), it may be beneficial to put off the home search for a little while and focus on credit repair. After all, a five-figure savings on your next home may be worth waiting for.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.