real estate

Clean Up Your Credit

Expect for lenders to take a hard look at your credit history, so take care of any potential problems ahead of time.

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If you're considering buying a home in the near future, you should be paying attention to your credit status now. Any lender is going to scrutinize your monthly income and outgo at the time you apply for a mortgage. Here's what you need to look out for:

Take Our Quiz: Will It Sink Your Credit Score?

Debts and other obligations reduce the amount of cash you can spend on housing, so try to clear the decks as much as possible before applying for a loan. Pay off as many high-interest consumer loans as possible. If you are planning to buy a new car, boat or major furniture (paying by either cash or credit), postpone the purchases until after you've closed on the purchase of your home.

Mortgage lenders request a mortgage credit score from credit bureaus to help them determine your creditworthiness. The score is determined by a statistical analysis of the information contained in your credit file. A good score may change the time required to get approval on your mortgage as well as the rate you receive and the way in which your mortgage is managed.

The analysis takes into account about 100 variables gathered from your credit file at one of the big three credit bureaus -- Experian, Equifax and Trans Union -- and specifically looks at such things as how much you are currently in debt, how many places you have applied for credit recently (shopping for a mortgage won't count against you), and what kind of credit you have taken in the past.

Before you apply for a mortgage loan, find out whether anything in your record might present a problem. Order a report at least two or three months before making a loan application to give yourself plenty of time to iron out any wrinkles that you discover.

Get Preapproved With a Lender

The next step is a visit with a lender -- mortgage company, savings and loan, bank or credit union -- to determine the upper price limit you can handle and the types of mortgages suited to your needs. Obtaining a preapproval letter from a lender ensures that you won't waste your time looking at houses you can't afford and reassures sellers that you can afford theirs.

You can usually do the preapproval interview over the phone. A loan officer will pull your credit score (this may cost $50 or so) and assess your income and savings. Be prepared with your two most recent pay stubs and tax returns -- along with net worth and monthly cash flow worksheets you've prepared. (It's also not too soon to begin pulling together at least two months' of your bank and investment statements, which lenders will require after they begin processing your application.)

You'll want to find out how much mortgage debt you can carry with the most commonly available mortgages.

Because the 30-year fixed-rate mortgage is still the benchmark against which other loans can be compared, find out what size conventional 30-year loan you can qualify for under the guidelines issued by secondary-market mortgage buyers such as Fannie Mae or Freddie Mac (these are known as "conforming" loans).

Also get information on adjustable-rate mortgages (which come with an initial fixed-rate period of one, two, three, five and more years), as well as a 15-year fixed-rate loan. Knowing what you can afford to buy with these four mortgage types is a useful starting point.

Finally, remember that you are not obliged to use the lender who preapproves you. When you're ready to borrow, compare the rates and mortgage options available from several lenders.

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