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Understanding Your Credit
For many of us, debt is a way of life. Installment payments and credit cards
can be useful financial tools. But if not controlled, credit eventually can
control you. To qualify for a mortgage loan, your credit history doesn't have
to be spotless, but your history must clearly show your willingness to pay your debts.
This section covers:
Your credit report
Correcting credit problems
Credit tips
Your credit report
When you apply for a mortgage loan from any lender, they'll look at
your credit record to see if you've been responsible about managing your
debts. Your credit record can be obtained from a credit bureau. The three largest credit reporting agencies are Equifax, Experian, and TransUnion.
Federal law gives you the right to review your own credit record, and it's smart to do so before you apply for a loan. You may request your credit report over the phone, on the Internet, or in writing. You are entitled to a free copy or your credit report if you have been denied credit, insurance or employment within the past 60 days based on information contained in your credit report. Otherwise, the credit reporting agency may charge you up to $8 for a copy of your report. The credit report will show your record of payments on loans, credit cards and other similar debts.
Review your report carefully for any past-due amounts or "charge-offs", which means that a bill was never paid. Make sure the credit report's information about you is correct. Your lender may need a written explanation for any late payments. 
Correcting credit problems with your lender
If your credit report includes little or no information, use your
payment history on rent and utilities. You can provide copies of
cancelled checks to show your strong payment history. This information
will become part of your application for a mortgage loan.
If you have a credit problem because of an unusual situation, write a letter of explanation. Your lender may overlook a credit problem if you can give a good reason for not making your payment.
It's important to let your creditors know if you're having problems
making payments. In many cases, creditors will help you relieve your
situation. Remember: creditors don't want to lose money, and they want
to help you pay them back. For example, some bank credit card companies
will reduce your monthly payment and give you more time to pay if they
know you're having problems meeting your current payments.
Credit tips
- Plan your purchases to use cash instead of credit, unless you can pay your credit card bills promptly.
- Borrowing small amounts on credit and paying them off promptly helps you establish a positive credit history.
- Avoid making large purchases before you buy a house, since the added debt will affect your mortgage qualifications.
- Know how much you owe on all of your accounts.
- Avoid skipping bills to make other payments. This is only a temporary solution if you have a long-term problem.
- Contact creditors immediately if you have a problem.
- Save money on a regular basis so that you have funds to fall back on in case of financial emergency.
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