Financial Literacy 2007 - Mortgages
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How credit scores affect mortgage rates

Other "offsetting factors" can balance a low credit score, such as a large down payment, large cash reserves or an overall low debt-to-income ratio, says Reed. The important thing is that borrowers not assume they can't get a mortgage because of a low credit score, or that they limit their loan search to lenders that specialize in loans to people with troubled credit.

"From a credit standpoint, the biggest thing people can do to harm themselves is to prejudge their situation because they thought they wouldn't qualify," says Reed.

He recommends looking for a lender who does not charge a fee just to take your application and qualify you for a loan. "There are plenty of other lenders out there who will do that as a customer service," he says.

Scrutinize your credit reports

Of course, you need to make sure that your credit score is the one you've truly earned. If there are mistakes on your credit reports, they will translate into lower scores.

At least six months before you intend to apply for a loan, get updated copies of your credit reports from Experian, Equifax and TransUnion, plus a copy of your FICO score. All borrowers are entitled to one free copy of each credit report annually through the www.annualcreditreport.com Web site. Through the www.myfico.com Web site, Fair Isaac charges $47.85 for the three reports plus their FICO scores that are based on those reports. The budget-minded might opt for the $15.95 choice, for one of their credit reports and a single FICO score. If you spot problems, you can always go back and order the other two individually without spending more than their three-report package.

Review each of your credit reports for errors. Sometimes other people's credit information can mistakenly make its way to your credit report.

Common names and family members' information can show up where they don't belong. There also can be errors about your payment history -- such as a notation of a missed payment when you can prove that you actually paid the bill.

Contact the lender involved with the error to straighten out the record. Normally it can take months for that information to make its way into your FICO score, according to Craig Watts, public affairs manager for Fair Isaac Corp. But if you're already in the mortgage application process, your lender can request that the credit report companies do a "rapid rescoring" of your credit and have such errors corrected within 72 hours, he says. Lenders pay the credit bureaus for that service.

Bump up your score

You also can improve your FICO score by paying down outstanding balances on your credit cards, says Watts.

"If you're only interested in improving your FICO score, you should start with accounts that are closest to the credit limits." Even if you never miss a payment, borrowing a large percentage of the credit that is available to you hurts your credit score.

Financial advisers usually recommend paying off the credit lines that have the highest interest rates first, and Watts recommends that approach if you also use the interest savings to pay down your closest-to-the-limit debts.

Don't close any accounts

What you should not do in hopes of boosting your credit score is close any credit accounts.

"Closing an account will never improve a FICO score, and in some cases it can inflict harm on a credit score," says Watts. That's because, if you've closed one or two credit accounts, but not reduced your overall borrowing, you've boosted your ratio of indebtedness compared to the total amount of credit available.

Lenders prefer to see that you have lots of credit available -- but relatively little of it actually borrowed.

How about you? Are you concerned about your mortgage? Pleased with the one you have?
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