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Managing Your Credit Wisely Improves Your Chances for a Good Mortgage

Whether you’re a first-time buyer or a seasoned homeowner looking to move up to a bigger or better house, how you have managed your consumer credit rating can have a real impact on both the amount and terms of your next mortgage.

Naturally, if you have kept your credit use reasonable and always paid your bills on time, you will most likely have very few difficulties obtaining a mortgage loan. But what if you are one of the many Americans whose credit report is less than perfect?

Contrary to popular belief, it is not impossible to obtain a mortgage with an imperfect credit rating. After all, mortgage lenders are in the business of providing loans, and have it in their interest as well as yours to find an appropriate way to finance your home purchase.

Credit Doesn't Necessarily Have to Be “Perfect” to Be Good

In the case of a single bad mark on an otherwise good credit history, many mortgage lenders will simply ask for a written explanation of the late payment. If the explanation is reasonable and believable, many lenders will overlook the isolated problem—especially if it occurred some time ago and your credit has been good since.

Indeed, as far as lenders are concerned, the most important time period in your credit history is just the preceding year or two.

According to guidelines established by the Federal National Mortgage Association (Fannie Mae), indicators of good credit do include some leeway for occasional late payments. Thus lenders will look at:

  • Revolving credit (e.g., credit cards), which should show no payments 60 days or more late and no more than two payments 30 days late;
  • Installment credit (e.g., an auto loan), which should show no payments 60 days or more late and no more than one payment 30 days late;
  • Housing payments (e.g., mortgage or rent), which should—not surprisingly—show no late payments (this can be proven by the payment history from a mortgage lender or by the borrower’s canceled checks for the past 12 months).
Credit Scoring Broadens Scope of Lenders’ Considerations

As credit scoring in mortgage loan decisions has become more sophisticated, lenders have also begun looking at other factors in your credit history as well. They might be concerned if your credit cards are “maxed out” (indicating possible future difficulties in managing debt and making payments) or, conversely, if you have large lines of credit available (that you could at some future time run up into unmanageable debt).

Some lenders will also look at how many inquiries have been made into your credit report recently, interpreting a large number of inquiries as a sign that you have applied for a large amount of credit lately. Applying for numerous lines of credit might indicate that you have been turned down by several other lenders or that you are in the process of accumulating new credit accounts which might leave you with too much credit available to be a good credit risk.

“Compensating Factors” Can Make a Difference

Credit scoring can also work to your benefit, helping to overcome potential problems like a high debt-to-income ratio or a slightly imperfect credit past. Scoring also considers “compensating factors” that Fannie Mae guidelines indicate might justify some degree of risk to the lender. These compensating factors include:

  • A large down payment;
  • An energy-efficient property (e.g., with up-to-date heating and power systems);
  • Previous large housing payments (such as high rent), which show the borrower’s ability to channel a larger-than-normal proportion of income to payments;
  • A history of good credit and the potential to accumulate savings in the future (despite a current low net worth);
  • The likelihood of career advancement and earnings increases due to strong education or job training (this is particularly helpful to young borrowers who carry student loan debt);
  • A substantial net worth (despite current low earnings).

Knowing about these compensating factors—and which of them are at play in your own situation—can help you to get the loan you need for the home you really want. But you also need to know what your credit history looks like on paper to be able to optimize your borrowing ability.

For example, you may have cut up a credit card years ago, but never bothered to actually close the account. This account shows up on your credit report as available credit, which lenders may think adds to your risk. The time to close this unused and unnecessary account is before you apply for a mortgage.

In addition, you will want to be confident that the information in your credit report is accurate. Inaccuracies in your credit report—or, worse, the damage done by credit or identity fraud—can seriously impact mortgage lenders’ likelihood of offering you a loan.

Reviewing Your Credit Report Puts You In Control

Many financial planning experts recommend checking your credit report on a regular basis in order to keep tabs on the information placed on it. Routine checking on your part allows you to stay on top of what credit grantors—including mortgage lenders—will read about you when they check your credit history, and enables you to dispute any inaccuracies and catch fraud before these problems impact your mortgage loan. Disputing inaccuracies can take up to 30 days to resolve, so taking care of them well in advance of applying for a mortgage is also important. makes it easy for you to order a copy of your credit report online, compiled by one of the three national credit reporting agencies. In addition, another very effective way to see all of the information that mortgage lenders will be looking at when considering your application, is to order a triple merged 3 Bureau Online Credit Report, which shows and explains the information on your credit report as compiled by all three of the national credit bureaus, Equifax, Experian and Trans Union.

The information provided by your credit report can be invaluable in understanding your credit rating as mortgage lenders see it, enabling you to dispute inaccuracies and know best how to present your correct credit history and circumstances in order to get the mortgage you seek.

Want to see an example of a credit report? Need an explanation of that report? Do you suppose if you knew what made up a credit score you could increase it? Ever wonder if certain parts of your credit score were more important than others? Those are just a few of the key issues you'll discover as you review two authoritative link resources-- Fair, Isaac Company and the 3 Credit Bureaus.

"As part of an ongoing initiative to empower consumers to understand and act on issues affecting their credit standing, Fair, Isaac and Company, Inc. (and Equifax announced a new strategic alliance designed to enlighten consumers about how credit decisions are made and enable them to impact and improve their individual credit standing. The new online credit score service... will provide consumers with an individual Equifax Credit Profile, a BEACON® score and a personalized score analysis designed to help consumers understand how their scores may be interpreted by lenders and affected by their credit behavior. The FICO® score - the premier risk score developed by Fair, Isaac is calculated on the Equifax Credit Profile."

The above link is from Fair Isaac and includes a good understand of FICO or credit scroring but in a differnt format than described below. Each component which make up your credit score is summarized and contains a link to a summary expansion page for additional information. Not only is each summary item expanded, but you can also find how much each category weighs with reference to the total score.

There is also a link in the left hand column entitled "Credit Scoring". Besides describing what credit scoring is all about, the bottom of the page ofers a link to FAQ. In addition to the links to credit bureaus and debt counselors, you will also find on the FAQ page a series of questions commonly asked with links to their answers. For example "Can inquiries hurt my score?" "What is a good score?" "How can I get my score?" "Who calculates my score?" plus 20-30 more. This Q&A page is definitely worth the time to review.

Credit Bureaus
Equifax Credit Reports
Sample Credit Report
Key to the Credit Report
BEACON Scoring Factors
Experian Credit Reports
Sample Credit Report
Key to the Credit Report
TRW National Risk Model Score Factor Codes
Trans Union Credit Reports
Sample Credit Report
Key to the Credit Report
EMPIRICA Scoring Factors
Credit Report Codes
HAWK Messages

Do You Know Your Credit Score?
Knowing your credit score is important whether you're applying for a new credit card, shopping for auto loans or considering a new mortgage. Lenders use credit scores to help them decide if you are a good credit risk. The higher your credit score, the more likely it is that you'll qualify for the best rates around.
Until recently, consumers found it difficult to find out their credit scores. However, now you can see your score in seconds!

The three major credit bureaus, Experian, Equifax and Trans Union have similar scoring models that generate credit scores based solely on their credit report data on you. There are also other credit scoring models in use, so your credit score can be different depending on which model is used and on which credit report your score is based.

Additionally, if you are working with a lender, s/he should tell you the reasons provided for a low score if that score is a factor in delaying or denying your loan application. A list of "score reason codes" comes with each credit score report a lender receives. The codes explain the top reasons your score was not higher, such as too many inquiries or delinquency on accounts.

Did you know you can get a FREE credit score when you order the 3 Bureau Online Credit Report? See all three of your credit files in one, simple report. Plus you have the option to see your credit scores based on all three of your reports.