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Section 3: Getting That Home Loan

Your credit health is the most important factor in deciding what interest rate you will pay on your mortgage.  The factors used to calculate your credit score are payment history, current debts, length of history, credit type mix, and frequency of applications for new credit.  The different scoring systems are based on different criteria, weighted differently, so the three major credit bureaus (Equifax, TransUnion and Experian) may produce different scores, even though the scores are based on the same credit report information.

Depending on your credit score, lenders will determine what risk you pose.  Increased credit risk as shown by a low credit score means that a risk factor is added to the price at which money is lent.  If you have a poorer credit score, lenders will lend you money at a higher interest rate than one paid by someone with a better credit score.

Below is a short list to help you ensure that your credit is in good shape:

Monitor and analyze your credit history

Know your credit scores.  If your credit is good, it will help you get approval.  Find out where your credit history can use improvement and take steps to make sure those improvements happen.

Report errors and inconsistencies

Do not let errors on your report make you pay more than you should.  Pull and check the three credit bureau reports and dispute any errors that affect your score such as wrong credit limits or incorrect accounts.

Pay off outstanding accounts

Having delinquent accounts or outstanding discrepancies on your credit report may hurt your chances of approval at the best interest rates.  Before applying for a mortgage, clear any such accounts that are hurting your score.

Decrease the percentage of your income that goes into paying debts (Debt-to-Income Ratio)

Your debt-to-income ratio compares your monthly debt expenses to your monthly gross income.  Keeping this ratio low will help with the amount of mortgage that you qualify for.  Depending on the lender and loan type, there are maximum debt-to-income ratios.

Beware of applying for credit

Every credit application you fill out leads to an inquiry that can decrease your score.

Applying for a mortgage means you will need to produce many documents, beginning with tax returns from the last three years.  Lenders also want to see monthly bank statements, proof of income and all debts you currently have.

If you have family or friends assisting you with the down payment, you will need to have a written "gift letter".  Otherwise, the amount will be considered a loan and included in your debt-to-income ratio.

You will need to have money for the down payment, closing costs, pre-paid property taxes and pre-paid homeowner's insurance.  If you are paying less on the down payment, you will be paying more monthly.

Improving your credit score will happen overnight.  It is essential that you begin keeping your credit score in check the moment you start thinking of buying your home.  A good credit score shows the lender that you are responsible with your borrowing and pose less risk to the lender.  Less risk to the lender will improve your interest rate, lowering your monthly payment.

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