Where Do You Start? Start With Your Credit!

When you look for a mortgage, lenders will review your credit report. Your credit report is a history of how you have managed your finances and repaid debt. It provides information on money you have borrowed and a history of your payments.

Your credit history is pulled together into a credit report by three private companies: Equifax, Experian, and TransUnion. These companies sell your credit report to banks and other creditors so they can review your mortgage and loan applications.

Your credit report includes:  

• A list of debts, such as credit cards and car loans, and a history of how you have paid them.
   
• Any bills that have been referred to a collection agency, including items like telephone and medical bills. 
   
• Public records, such as tax liens or bankruptcies, even if these are several years old. 
   
• Inquiries made about your creditworthiness. An inquiry is made when you request credit. Often your report will also show if you were given credit based on the inquiry.  

Most of the information in your credit report is deleted after 7 years - a bankruptcy is deleted after 10 years. Your credit report is continuously updated to reflect the latest information.

It's important that you look at your credit reports from each of the three companies to make sure they are correct. Your credit report may vary from one company to the other. 

Your Credit Score 

When you apply for a mortgage, the lender may request a credit score as well as a credit report. A credit score is a computer-generated number that indicates your ability and willingness to repay a debt based on your credit record. 

Your credit score is part of the mortgage information that will determine whether your application will be approved. Your credit score may also be used to determine your mortgage interest rate.

Start Building Your Credit 

Building good credit doesn't have to be difficult. Follow these tips and you're on your way: 

• Pay Your Bills on Time.
  How you've paid your bills in the past can indicate how you will pay in the future. Your most recent payment record is weighted heavily when determing your score.  
   
• Pay at Least the Minimum Amount Required.
  You can always pay more, but you should never pay less. 
   
• Keep Credit Card Balances Low.
  Don't "max out" your credit cards. You should never have a balance of more than 60% of your loan limit. Less is even better.
  
  
• Don't Pay Off the Balances Monthly.
  Keep a balance, even if a small one. This will help to increase your credit scores.
  
  
• Don't Close Credit Accounts.
  Closing credit accounts can actually lower your credit scores for a period of time.
  
  
• Don't Apply for Too Many Loans or New Accounts.
  Requesting a lot of credit over a short time period may cause lenders to doubt that you will manage your debt well.  
   
• Establish Credit if You Have None. 
   
• Use the Cards Carefully and Pay Them Off Each Month.  

Make a Budget and Live Within It!

A budget will help you meet your monthly bills and, therefore, help your credit. It also can help build your savings for things like a down payment on a house.

Demonstrating your ability to save and having funds on hand will help you in the mortgage approval process. Your personal savings should be sufficient to last several months should you lose your job or source of income.