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Securing the loan: Your credit and credit score

Mortgage lenders closely scrutinize your financial history to determine whether to approve your loan application.

Of primary concern are your credit report, which details your loan history, credit cards, mortgages, bankruptcy filings and other financial information, and your credit score, which uses your credit report to arrive at a numerical representation of your overall creditworthiness.

Credit scores (sometimes called FICO scores after Fair Isaac & Co., the firm that created the most commonly used form) range from the 300s to about 900, with most home buyers falling in the 600-700 range.

Factors used to determine your credit score include:

  • Past delinquency: Those who have failed to make payments in the past tend to do so in the future. The more recent a delinquency, the more it counts against you; a 30-day delinquency within the past 12 months really hinders your chances of securing favorable mortgage terms.
  • Length of credit: The longer you've had credit, the better.
  • Credit use: If you're "maxed out" or close to your credit limits, you're viewed as risky.
  • Mix of credit: Someone with a combination of revolving and installment debt is considered less risky than one with only a secured credit card.
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The higher your credit score, the less risky you appear to a lender. A good credit score will help you qualify for a mortgage loan and obtain better terms.

Cleaning up your credit report
Why check your credit report before your lender does?

Because an estimated four out of five credit reports contain some kind of misinformation -- errors you'll want to clear up before approaching any lender.

Obtain copies of your credit report from all three credit reporting agencies -- Equifax, Experian and Trans Union. Probably each will differ from the others in small ways.

Tips for cleaning up your credit report

  • Look closely for any errors and correct them. Check for credit cards you no longer use and close them out.
  • Note late payments and credit balances; you may have to explain them to a lender.
  • Compare account numbers to make sure they're yours.
  • Resolve outstanding bills.
  • Pay all bills on time.
  • Limit your amount of outstanding credit. Even if you pay your bills on time, you'll improve your credit score by having lower balances and fewer cards.
-- Posted: March 15, 2004
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