One of the hallmarks of the American dream is home ownership, but gone are the days when banks were willing to offer low interest rates for mortgages with bad credit. At the height of the real estate bubble, it wasn’t uncommon for mortgage lenders to use creative financing to lend money to individuals with bad credit, often without documentation verifying income or employment.

Today, with the rise in foreclosures, banks are much more cautious about lending money to people with bad credit. Banks and mortgage lenders are nervous that if they lend money to a homeowner, they may not get their money back. Therefore, your interest rate for a mortgage with bad credit score will be higher than the mortgage interest rate paid by someone with a good credit history.

So what can you do if you’re an individual with bad credit looking for a low interest rate on a home loan?

In “6 Factors Controlling Your Mortgage Interest Rate,” Dr. Maya Swamy, the “No Excuses Realtor®,” outlines the various factors that influence whether or not you can get a low interest rate on a home loan. While there are certain factors over which you have no control, like the cost of money influenced by the interest rate set by the Federal Reserve, otherwise known as the federal funds rate, you do have control over those factors affecting your credit rating.

When a mortgage lender is trying to determine the interest rate for a mortgage with bad credit, they are looking at the borrower’s ability to pay. Just how good does your credit rating have to be to get a low interest rate on a home loan?

Borrowing money costs money, and here’s an example. A bank advertises a refinance mortgage rate: “30-Year Fixed Home Loans Start Week at 4.4% for Many Borrowers.” That sounds exciting, right? However, you will only get that low interest rate on a home loan if you have an impressive credit rating above 740. The bank is not willing to offer a low interest rate on a mortgage for a person with bad credit. The bad credit borrowers will have to pay more. Typically, if individuals do not have a credit score of above 740 and a debt to income ratio below 40 percent, it is unlikely they can lock into a 30-year fixed home loan rate at the lowest rate. In fact, while the good credit borrower might pay a low 4.4 percent interest rate on a home loan, the bad credit borrower may pay well over 5 percent or more on an interest rate for a mortgage with bad credit, if he/she can get a home loan at all.

While a fraction of a percentage point may not sound like much, when you calculate the effect it has on what a borrower pays over the life of a 30-year mortgage, we’re talking tens of thousands of dollars. Even a small change in mortgage interest rates can greatly influence the overall cost of a mortgage. Because borrowing money costs money, if you’re looking for a low interest rate on a home loan, it is in your best interest to make every effort to clean up any bad credit before purchasing a home.

If you want to pay a low interest rate on a home loan, here is a to-do list to work on while you plan for your dream house:

• Save for a substantial down payment. Mortgage lenders like to see a down payment of at least 20 percent, and by limiting the mortgage to only 80 percent of the price of the home, you can avoid paying for property mortgage insurance (PMI).

• Pay down your high interest non-mortgage debt, like credit cards and auto loans.

• Buy at a time when mortgage interest rates are favorable, like now. Mortgage interest rates are still at historic lows, and it is more likely that they will go up in the future than down.

• Clean up your credit report. Bad debts, collections, and bankruptcies will all negatively affect your credit rating and result in paying a higher mortgage interest rate. Talk to your creditors and pay off bad debts in exchange for having the information taken off your credit report.

• Try to qualify for an insured mortgage program such as FHA or VA loans. These often have strict borrowing criteria, but because they are insured, they often charge lower interest rates on home loans than other mortgage lenders.

The bottom line? If you want to pay a low interest rate on a home loan, you have to make certain that you’re financially prepared to take care of the items listed above.