Check Your Credit History

Your lender will review your credit history as part of the mortgage approval process. The credit report will be scored through a third-party agency. That score will determine whether or not you are eligible for certain mortgage products and will play a part in determining the interest rate on the mortgage.

Before going to a lender to determine your capacity to purchase, it is advisable that you get a copy of your credit report. You can receive a free copy of your credit report from each credit reporting agency (Equifax, Experian, and TransUnion) through www.annualcreditreport.com.

The purpose of this exercise is to correct all errors on your credit reports prior to going to the lender. The more accurate the credit report, the more accurate the credit score. It is advisable to obtain the credit reports from the three agencies because you do not know which credit reporting agencies your lender will use to review your credit history.

Each credit reporting agency has a recommended process to correct incorrect or old information. Follow the instructions given on the website or included with the mailed credit report. If you receive your credit report by mail, there will be a form included in the mailing to correct errors on your credit report. Even if the error is the same on the three credit reports, you must correct them separately. The credit reporting agencies are not communicating with each other but they are communicating with your creditor. You must follow through with the process until the information is corrected on each report.

One of the options offered to you when ordering your credit report is an opportunity to view your credit score or FICO (Fair Isaac and Company) score. The FICO credit score is determined by a number of factors including on time bill payment, how long you have had credit, and how much debt you have in relation to how much credit you have available. Lenders use your credit score to determine their risk in giving you a mortgage. FICO scores range from 350 to 850. A score below 500 is not considered for a mortgage of any kind.

Your credit score plays an important role in the interest rate that you will pay for a mortgage. A borrower with a credit score of 750 will receive an interest rate of 3% less than a borrower with a score of 575. With a $250,000 loan, the difference in the monthly mortgage payment is $462. For more information on FICO Credit Scores click here.

If your credit reports are accurate and you feel in control of your debt, make an appointment with your lender. Keep in mind that the lender would like to see that you have not been late paying bills in the past year. If you feel that you need additional assistance, seek out a Financial Education class such as Credit Smart and Money Smart or contact a reputable credit repair organization such as Consumer Credit Counseling Services. For more information on working on your credit click here.

Also see these financial calculators:

Loan Rate/FICO Savings Calculator (see how your FICO score impacts your loan rate)

Credit Card Debt Pay-off Calculator

Credit Card Comparison Calculator

Pay Off Debt or Invest in Savings Calculator

Savings Calculator

Also feel free to check out Square Feet Chicago's Section on Understanding Credit.