LESSON 5: Reviewing Your Credit and Getting Loan Pre-Approval

Is your credit in good shape? Would you know if it were not? When it comes time to apply for a mortgage loan, you'll want your credit to be as clean as possible to get as much mortgage as you need at the lowest possible rate.

Take A Peek

It's a good idea to have a look at your credit report before you apply for a home loan. Contact one of the three largest credit bureaus -- Experian, Equifax and TransUnion -- to get a copy of your report. (Their websites: www.experian.com, www.equifax.com, www.transunion.com.) In fact, you may want to request reports from all three since some information may appear in one report that doesn't show up in another. (That's also why most lenders look at a 'three-file merged' report.)

Here's what lenders hope to see:

' All bills are current and have been paid on time for at least two years prior to the loan application.

' Mortgage or rent payments have not been more than 30 days late.

' Installment and credit-card payments have not been more than 60 days late.

' Charge-offs should be resolved before making application for a loan.

' Old credit-card accounts have been closed out.

' Any late payments have been explained in writing.

Looking at your report early will allow you to clear up any inaccuracies you may find. You may also have time to make some adjustments to your financial picture, improving the credit score lenders will base some or all of their decision on.

Your Credit Score

The most recent approach to rating credit -- credit scoring -- has been replacing traditional underwriters' judgments for several years now. A credit score is developed using a standard formula that takes lots of factors into consideration including your income, the number and types of credit you have available, the length of your credit history, total credit balances, your repayment history (including judgments and liens), even the number of recent inquiries from creditors.

Your credit score will be given an A, B, C or D rating, depending on the lender's standards. A score of 800 is considered perfect, but scores above 660 often fall into the top A rating and qualify for the lowest interest rates.
Remember, not all credit flaws are equal -- lenders will overlook some more easily than others. The best way to get your credit picture cleaned up for a mortgage loan application is to retire as much debt as possible beforehand. In particular, pay off and close all but one or two credit cards, and refrain from applying for any additional credit (even a gas card or furniture store financing) until you've settled on your home.

Get Mortgage Pre-Approval

Once you have your credit ready for a lender's scrutiny -- and before you even start home shopping -- get pre-approved for a mortgage loan. Being pre-approved means the lender has already processed much of the paperwork for the loan (application, credit check, etc.) and has committed (with certain conditions) to lending you up to a specified amount of money for a qualified home purchase. A loan application fee may be required.

Pre-approval is better than pre-qualification, which only gives you an estimate of how much you can borrow, assuming there are no surprises in the credit- and income-checking process. Being pre-approved, however, will give you bargaining power when it comes time to make an offer on a home. You'll know exactly how much home you can purchase, and sellers will view you as a serious buyer -- one who's likely to go to settlement.

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