A mortgage is a loan used to purchase a home, where the property serves as the borrowers collateral.

Definition of 'Amortized Loan'

A loan with scheduled periodic payments of both principal and interest. This is opposed to loans with interest-only payment features, balloon payment features and even negatively amortizing payment features.

Investopedia explains 'Amortized Loan'

Borrowers who choose amortized loans are less likely to experience "payment shock" than borrowers who choose loans which are not fully amortized. Payments on loans that are not initially fully amortized must at some point become amortized over the remaining term of the loan in order to repay the outstanding principal balance. The shorter the remaining term, the larger the increase required in the periodic payments to amortize the loan over the remaining term.

Collateral
Collateral may be defined as property that secures a loan or other debt, so that the property may be seized by the lender if the borrower fails to make proper payments on the loan. When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made. For example, the useful life of the collateral will typically have to exceed, or at least meet, the term of the loan; otherwise the lender's secured interest would be jeopardized. Consequently, shortterm assets such as receivables and inventory will not be acceptable as security for a long-term loan, but they are appropriate for short-term financing such as a line of credit. In addition, many lenders will require that their claim to the collateral be a first secured interest, meaning that no prior or superior liens exist, or may be subsequently created, against the collateral. By being a priority lien holder, the lender ensures its share of any foreclosure proceeds before any other claimant is entitled to any money.

Properly recorded security interests in real estate or personal property are matters of public record. Because a creditor wants to have a priority claim against the collateral being offered to secure the loan, the creditor will search the public records to make sure that prior claims have not been filed against the collateral. If the collateral is real estatepersonal property In startup businesses, a commonly used source of collateral is the equity value in real estate. The borrower may simply take out a new, or second, mortgage on his or her residence. In some states, the lender can protect a security interest in real estate by retaining title to the property until the mortgage is fully paid.

If your debt ratio is more than 42% you have no choice. No bank will give you a loan when your debt ratio is already this high. You must pay down your debt first. (Most banks had a hard upper limit of 42%, and as of 2014 it became enshrined in law.)

If your current debt ratio is more than about 20%, you have little choice: With a debt ratio this high your borrowing power is severely limited. Pay down your debt to below a 20% debt ratio. Banks consider 16-19% to be a moderate debt ratio.

If your debt ratio is less than 20% and paying down your debt would mean that you can't make a 20% down payment, keep the cash and make the 20% down payment. Putting 20% down can get you a better interest rate, make it easier to qualify for the loan, makes for a smaller mortgage payment, and means you don't have to pay for Private Mortgage Insurance.

If you're not going to be buying for at least a few months, and some of your debt is high-interest (more than 10% interest, like credit cards), and paying down your debt won't keep you from putting 20% down on the house, then pay down at least some of your high interest debt. Pay at least 2-3 times the minimum payment each month, or more.

Don't worry about paying down your debt if your debt ratio is 6% or less. Banks don't limit your monthly payment with the debt ratio alone, they limit it also with the housing ratio, which is a percentage of your income regardless of how much debt you have. When you have a lot of debt the debt ratio is the limiting factor in how much you can borrow, but when you have little to no debt, the limiting factor is the housing ratio. If your debt ratio is 6% or less then paying down your debt probably won't let you get a bigger loan, so don't worry about paying it down.

If you don't fall into any of the above categories, then it probably doesn't make a lot of difference what you do. One choice will be better than the other to be sure, but the difference probably won't be that great, and it will take some doing to figure out. At that point I wouldn't worry about it, but if you're determined to find an answer then talk to a loan officer at a bank.

Definition of 'Loan-To-Value Ratio - LTV Ratio'

A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance. Calculated as:

Debt Burden Ratios

Definition of Debt Burden: Debt burden is the cost of servicing debt. For consumers it is the cost of interest payments on debt. The debt burden will be higher for credit cards and loans with high interest. The debt burden on mortgages will be relatively lower compared to value of loan. For countries the debt burden is the cost of servicing the public debt. Most of this debt burden is a really transfer from one generation to another. However, National debt can be a real debt burden because:

If the debt is held externally. E.g. 25% of US debt is held abroad making US liable for external interest transfers. When debt is held externally, it may also cause a depreciation in the exchange rate and hence a worsening of the terms of trade. (imports more expensive) High public debt may also cause higher taxes which distort work incentives e.t.c

1.

The debt burden of an institution or an individual is the amount of mandatory debt payments that must be made for a given accounting period. Debt burden ratio is the relationship between this amount and the income or earnings of the indebted entity. The ratio is a useful metric in predicting loan repayment ability.

Debt Burden
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Your debt burden is simply the sum of all periodic debt payments you must make. The monthly debt burden would be the amount of money you must pay to your creditors every month, while the annual debt burden would take into account all mandatory payments over a 12-month period. For a typical individual or family, the debt burden may include monthly minimum credit card payments, mortgage payments, car payments and other recurring bills from creditors, including payments you must make for consumer goods bought on credit, such as the $45 monthly payment for the plasma TV you bought with no money down.

Debt Burden Ratio

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The debt burden ratio is defined as your debt burden divided by your after-tax income. If the total monthly debt payments are $2,500 and your take-home, after-tax pay is $5,000 per month, your debt burden ratio is 0.5, which, expressed in percentage terms, is 50 percent. The higher the debt burden ratio, the less of your income is "disposable," or available to spend as you wish. In the prior example, only half of your income is under your control, while the other half must go to mandatory payments.
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Significance
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The debt burden ratio primarily measures the likelihood that you can repay your existing loans. The lower the ratio, the easier it is for you to make your monthly loan payments, because they constitute a relatively small percentage of your income. The debt burden ratio is not a measure of how favorable your loans terms are. You may be paying an extremely high rate of 40 percent on your credit card debt. If, however, you only have only $1,000 in outstanding credit card debt, the monthly payment and your debt burden ratio likely will be low. When you apply for additional credit, this ratio is a critical factor considered by potential creditors. The lower the ratio, the easier it is to obtain new lines of credit.

Additional Factors
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Although the debt burden ratio is a useful metric that is easy to calculate, it does not provide a full picture of your financial condition, unless additional factors are considered. One factor to be considered is your asset base, which is the value of your possessions as a given time. You may only be making $4,000 per month, which barely exceeds the $3,500 you must pay to creditors. But if you have several million dollars invested in gold and long-term bonds, you probably will have no problems making those monthly payments. An additional factor is how easily you can eliminate your loans. Your can eliminate a car loan by selling the car and paying off the loan with the proceeds from the sale, for instance. The same maneuver cannot be used to get rid of credit card bills, however.

Applying for a Mortgage How Lenders Evaluate a Loan Application

Have Your House in Order Before Applying for a Mortgage

Michael Roche, Yahoo Contributor Network Oct 13, 2011 "Share your voice on Yahoo websites. Start Here."

MORE: Mortgage Payments Loan Application Credit Scoring Debt Ratio FlagPost a comment

For several reasons, most home buyers are apprehensive of the mortgage application process. Fear of the unknown is the primary concern followed by fear of rejection and anxiety related to divulging personal financial data. Applying for a mortgage becomes much more relaxed when the applicant has a thorough knowledge of how their qualifications are evaluated. Every application is evaluated by an underwriter and the approval or rejection decision is based on four primary criteria. They are the borrower's credit profile; income and debt ratios, liquid and semi liquid assets, and an appraisal of the contracted property. Each of these factors must meet certain standards for the application to be approved. These standards are consistent between lenders because mortgage originators universally subscribe to FNMA/FHLMC guidelines. Credit Profile Credit analysis is based on a tri-merged credit report consolidating the records of Experian, Trans Union, and Equifax into one report. Each of these repositories will provide a credit score. For underwriting evaluation the high and the low scores are eliminated although the credit data and history is not. The middle credit score is considered the more reliable application score because creditors do not always report to all three bureaus. Credit scores can vary significantly due to unreported positive or negative data. The minimum middle score required by lenders in today's mortgage world is 640. Higher scores may provide the borrower some qualifying, loan program and interest rate advantages. Lower scores above 600 are not necessarily a show stopper but are certainly problematic. All debt listed on the tri-merged credit report is considered in the evaluation process. Qualifying ratios are determined by the minimum monthly payment required by each credit account with an outstanding balance. Underwriters are normally only concerned with debts listed on the credit report. If an applicant bought an auto from a relative and is making monthly payments to that person, that debt would not be considered in qualifying because individuals do not normally report

to the repositories and is therefore unknown to the underwriter. Obviously it is imperative that borrowers obtain a copy of their credit report and reconcile inaccuracies prior to applying for a mortgage. Income and Debt Ratios There are two mathematical calculations underwriters apply in evaluating the borrower's ability to consistently make the mortgage payment. The "Income Ratio" is simply the total monthly mortgage payment divided by total gross monthly income. The "Debt Ratio" is the total monthly mortgage payment plus minimum payment on long term debt divided by gross monthly income. FNMA underwriting guidelines suggest a cap of 28% on the income ratio and 36% on the debt ratio. However this can be a little nebulous because there is a great deal of flexibility in the ratios based upon "compensating factors". High credit scores, exceptional liquid and semi liquid assets, job stability, upward career mobility and other factors that give strength to borrowers ability to repay the loan. In these cases income ratios may be stretched into the high thirties and debt ratios into the high forties. Home buyers frequently stretch their buying power to close to the limit because they know that a mortgage payment that is a little too high today will not be a problem in the future. Underwriters have flexibility in the debt sector and strategies can be employed to keep ratios in line. Installment loans do not count in the qualifying ratios if there are ten or fewer installments remaining. An auto loan with eighteen payments remaining may be paid down to ten months therefore eliminating the debt for ratio purposes as long as the borrower can document that the funds are available to do so. Student loans can be consolidated to reduce their monthly payment and credit card balances can be reduced. Liquid Assets For most first time home buyers the primary difficulty is accumulating the capital required for the purchase transaction. An FHA mortgage requires a down payment of 3.5% of the purchase price and the seller is allowed to pay all of the purchasers closing cost up to six percent of the purchase price. Since the closing costs are normally two to three percent of the sales price in most jurisdictions, the remainder of the six percent seller contribution can be used to buy down the interest rate

substantially. This strategy will certainly limit the buyers negotiating power with the seller but a home can be purchased with less than 5% into the transaction. Mortgage applicants are required to document the source of their funds to complete the purchase transaction plus reserves of several months of mortgage payments with some programs. In addition to bank deposits, sixty percent of 401K and IRA balances are considered liquid because these funds can be borrowed without interest or penalty. Otherwise, borrowed funds to complete the purchase are not allowed. Gifts from relatives must be documented but are acceptable. Deferred income payments or bonuses are also acceptable but must be received prior to closing. The primary concern of the underwriter is that all the required funds are not borrowed and thoroughly documented. Appraisal Lenders are investing in the applicant and the property as well. They will require that an approved appraiser inspect the subject property and submit a report. The borrower is required to pay for the appraisal and the credit report up front. All other fees associated with the loan are normally collected at settlement. The appraiser will evaluate recent comparable sales, property condition, neighborhood and community influences and determine a market value for the property. The lender will grant the mortgage based on the sales price or appraised value whichever is less. This is a great protection for the buyer as well as the lender. For those who are comfortable that they can afford the payments, have their credit scores and debts in control and can reconcile the cash requirements, the mortgage approval is a matter of documentation and there is not much to be afraid of. Visit http://www.onlinemortgageresources.com for comprehensive insight into lending and real estate matters. Want to learn about how defective the credit reporting industry is in America. More importantly, you will learn how to use this to your advantage. This could help you wipe the slate clean and get a fresh start! Visit http://www.1stchoicefamily.com/agent/mr and click "Credit Restoration". The education is free and the site offers a credit restoration service that is second to none. They have represented 188,000 clients in 11 years and claim to have "never lost a case".

Credit Evaluation and Approval

Related Terms: Cash Flow Management Credit evaluation and approval is the process a business or an individual must go through to become eligible for a loan or to pay for goods and services over an extended period. It also refers to the process businesses or lenders undertake when evaluating a request for credit. Granting credit approval depends on the willingness of the creditor to lend money in the current economy and that same lender's assessment of the ability and willingness of the borrower to return the money or pay for the goods obtainedplus interestin a timely fashion. Typically, small businesses must seek credit approval to obtain funds from lenders, investors, and vendors, and also grant credit approval to their customers.

EVALUATING CREDIT WORTHINESS

In general, the granting of credit depends on the confidence the lender has in the borrower's credit worthiness. Credit worthinesswhich encompasses the borrower's ability and willingness to payis one of many factors defining a lender's credit policies. Creditors and lenders utilize a number of financial tools to evaluate the credit worthiness of a potential borrower. When both lender and borrower are businesses, much of the evaluation relies on analyzing the borrower's balance sheet, cash flow statements, inventory turnover rates, debt structure, management performance, and market conditions. Creditors favor borrowers who generate net earnings in excess of debt obligations and any contingencies that may arise. Following are some of the factors lenders consider when evaluating an individual or business that is seeking credit: Credit worthiness. A history of trustworthiness, a moral character, and expectations of continued performance demonstrate a debtor's ability to pay. Creditors give more favorable terms to those with high credit ratings via lower point structures and interest costs. Size of debt burden. Creditors seek borrowers whose earning power exceeds the demands of the payment schedule. The size of the debt is necessarily limited by the available resources. Creditors prefer to maintain a safe ratio of debt to capital. Loan size. Creditors prefer large loans because the administrative costs decrease proportionately to the size of the loan. However, legal and practical limitations recognize the need to spread the risk either by making a larger number of loans, or by having other lenders participate. Participating

lenders must have adequate resources to entertain large loan applications. In addition, the borrower must have the capacity to ingest a large sum of money. Frequency of borrowing. Customers who are frequent borrowers establish a reputation which directly impacts on their ability to secure debt at advantageous terms. Length of commitment. Lenders accept additional risk as the time horizon increases. To cover some of the risk, lenders charge higher interest rates for longer term loans. Social and community considerations. Lenders may accept an unusual level of risk because of the social good resulting from the use of the loan. Examples might include banks participating in lowincome housing projects or business incubator programs.

OBTAINING CREDIT APPROVAL FROM LENDERS

Many small businesses must rely on loans or other forms of credit to finance day-to-day purchases or long-term investments in facilities and equipment. Credit is one of the foundations of the American economy, and small businesses often must obtain credit in order to compete. To establish credentials for any credit approval process, from short-term loans to equity funding, a small business needs to have a business plan and a good credit history. The company must be able to show that it can repay the loan at the established interest rate. It must also demonstrate that the outlook for its type of business supports planned future projects and the reasons for borrowing. In applying for credit, small business owners should realize that potential creditorswhether banks, vendors, or investorswill seek to evaluate both their ability and willingness to pay the amount owed. This means that the creditor will examine the character of the borrower as well as his or her ability to run a successful business. Creditors will also look at the size of the loan needed, the company's purpose in obtaining funds, and the means of repayment. Ideally, lenders evaluating a small business for credit approval like to see up-to-date books and business records, a large customer base, a history of prompt payment of obligations, and adequate insurance coverage. The process of granting loans to businesses is regulated by the Federal Trade Commission (FTC) to ensure fairness and guarantee nondiscrimination and disclosure of all aspects of the process. The Small Business Administration (SBA) publishes a series of pamphlets and other information designed to assist businesses in obtaining loans. These publications advise businesses on a range of credit approval topics, including describing assets, preparing a business plan, and determining what questions to expect and how to prepare responses to those questions.

GRANTING CREDIT APPROVAL TO CUSTOMERS

Credit approval is also something that a small business is likely to provide for its customers, whether those customers are primarily individual consumers or other businesses. The process by which a small business grants credit to individuals is governed by a series of laws administered by the Federal Trade Commission that guarantee nondiscrimination and other benefits. These laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Fair Debt Collection Practices Act, and Fair and Accurate Credit Transactions Act. Experts recommend that small businesses develop credit policies that are consistent with overall company goals. In other words, a company's approach toward extending credit should be as conservative as its approach toward other business activities. While granting credit to customers can offer a small business a number of advantages, and in fact is a necessary arrangement for many types of business enterprises, it also involves risks. Some of the disadvantages of providing customers with credit include increasing the cost of operations and tying up capital that could be used elsewhere. There is also the risk of incurring losses due to nonpayment, and of eroding cash flow to an extent that requires borrowing. But granting credit does offer the advantage of creating a strong base of regular customers. In addition, credit applications provide important information about these customers that can be used in mailing lists and promotional activities. In the retail trade, furthermore, credit purchasers have proven to be less concerned with prices and inclined to buy more goods at one time. When developing credit policies, small businesses must consider the cost involved in granting credit and the impact allowing credit purchases will have on cash flow. Before beginning to grant credit to customers, companies need to be sure that they can maintain enough working capital to pay operating expenses while carrying accounts receivable. If a small business does decide to grant credit, it should not merely adopt the policies that are typical of its industry. Blindly using the same credit policies as competitors does not offer a small business any advantage, and can even prove harmful if the company's situation is atypical. Instead, small businesses should develop a detailed credit policy that is compatible with their long-term goals. The decision about whether to grant credit to a certain customer must be evaluated on a case-bycase basis. Each small business that grapples with this issue needs to gather and evaluate financial information, decide whether to grant credit and if so how much, and communicate the decision to the customer in a timely manner. At a minimum, the information gathered about a credit applicant should include its name and address, Social Security number (for individuals), bank and/or trade references, employment and income information (for individuals), and financial statements (for

companies). The goal is to form an assessment of the character, reputation, financial situation, and collateral circumstances of the applicant.

Credit Programs for Business Customers

There are many avenues available to small businesses for gathering information about credit applicants. In the case of business customers, a small business's sales force can often collect trade references and financial statements from potential customers. The small business can also contact local attorneys to find out about liens, claims, or actions pending against the applicant, and can hire independent accountants to verify financial information. An analysis of a company's debts, assets, and investments can provide a solid picture of its credit worthiness, particularly when the data are compared to a composite of companies of similar size in similar industries. It is important to note that all information gathered in the credit approval process should be held strictly confidential.

Credit Programs for Individual Consumers

Consumer credit bureaus are a useful resource for small businesses in evaluating the credit worthiness of individual customers. These bureaus maintain records of consumers' experiences with banks, retailers, doctors, hospitals, finance companies, automobile dealers, etc. They are able to provide this information in the form of a computerized credit report, often with a weighted score. Still, credit bureau reports do have some potential for error, so small businesses should not necessarily use them as the only source of consumer credit information. It is also important to note that credit granted to consumers is subject to the federal Truth in Lending Law, as well as a number of other federal statutes. Many small businesses, particularly in the retail trade, choose to participate in major credit card plans. Allowing customers to pay with credit cards offers businesses a number of advantages. Since most large retailers provide this service to customers, accepting credit cards helps small businesses compete for new customers and retain old ones. In addition, customers are often tempted to spend more when they do not have to pay cash. The convenience of credit card purchases may also attract new business from travelers who do not wish to carry large sums of cash. Finally, credit card programs enable small businesses to receive payment more quickly than they could with an individual credit account system. The main disadvantage to participating in credit card plans is cost, which may include card reading and verification machinery, fees, and a percentage of sales. Credit cards also make it easier for customers to return merchandise or refuse to pay for items with which they are dissatisfied. Still, in this technological age, few small businesses (or large ones, for that matter) can afford to forsake membership in some sort of credit card plan.

Another common type of consumer credit is an installment plan, which is commonly offered by sellers of durable goods such as furniture or appliances. After credit approval, the customer makes a down payment and takes delivery of the merchandise, then makes monthly payments to pay off the balance. The down payment should always be large enough to make the purchaser feel like an owner rather than a renter, and the payments should be timed so that the item is paid off at a faster rate than it is likely to depreciate from use. The merchandise acts as collateral and can be repossessed in the case of nonpayment. Although installment plans can tie up a small business's capital for a relatively long period of time, it is possible to transfer such contracts to a sales finance company for cash.

Credit scoring
Credit scoring is a system used by creditors to decide how much of a risk it is to lend to you. When you apply for credit, you complete an application form which tells the lender lots of things about you. Each fact about you is given points. All the points are added together to give a score. The higher your score, the more credit worthy you are. Creditors set a threshold level for credit scoring. If your score is below the threshold they may decide not to lend to you or to charge you more if they do agree to lend. Different lenders use different systems for working out your score. They won't tell you what your score is but if you ask them, they must tell you which credit reference agency they used to get the information about you. You can then check whether the information they used is right. Because creditors have different systems to work out credit scores, even if youre refused by one creditor, you might not be refused by others. You may be able to improve your credit score by correcting anything that is wrong on your credit reference file.

What information is kept by credit reference agencies

Credit reference agencies are companies which are allowed to collect and keep information about consumers' borrowing and financial behaviour. When you apply for credit or a loan, you sign an application form which gives the lender permission to check the information on your credit reference file. Lenders use this information to make decisions about whether or not to lend to you. If a lender refuses you credit after checking your credit reference file they must tell you why credit has been refused and give you the details of the credit reference agency they used.

There are three credit reference agencies - Experian, Equifax and CallCredit. All the credit reference agencies keep information about you and a lender can consult one or more of them when making a decision. The credit reference agencies keep the following information: The Electoral Roll. This shows addresses you've been registered to vote at and the dates you were registered there Public records. This includes court judgments, bankruptcies and in England, Wales and Northern Ireland, IVAs, Debt Relief Orders and Administration Orders. In Scotland it includes decrees, sequestration orders, DAS Debt Payment Programmes and Trust Deeds Account information. This shows how you have managed your existing accounts such as your bank account and other borrowing. It shows lenders whether you have made payments on time Home repossessions. This is information from members of the Council of Mortgage Lenders about homes that have been repossessed Financial associations. This shows details of people you are financially connected to. For example, it includes people you've applied jointly for credit with or who you have a joint account with Previous searches. This shows details of companies and organisations that have looked at information on your file in the last 12 months Linked addresses. This shows any addresses you have lived at.

If there has been any fraud against you, for example if someone has used your identity, there may be a marker against your name to protect you. You will be able to see this on your credit file.

Can you still get credit if you have a low credit score
If you have a low credit score, a lender may ask for a guarantor. A guarantor is a second person who signs a credit agreement to say they will repay the money if you don't. This can be a way you can borrow money or get credit when on your own you might not be able to. If you are using a guarantor to borrow, they'll also have to give information about their personal details so that the creditor can check they're credit worthy. Try to pick a guarantor who is likely to have a good credit score. The guarantor is responsible for paying the money back if you don't and they have the same rights as you under the credit agreement. For example, the guarantor should get the same information before and after signing an agreement. If you are thinking about agreeing to be a guarantor for someone else, make sure you understand what you are agreeing to. Read all the small print in the agreement before signing it.

For more information about your rights when you sign a credit agreement, see Your rights when you borrow. Back to top

What you can do if you are refused credit

If you are refused credit, you may be able to do one of several things.

Clean up your credit reference file

Check your credit reference file before you apply for credit or a loan so that you know whether there are any facts about you which might affect your credit score. Facts which might affect your credit rating include court judgments or a poor payment record. Get any incorrect information changed or removed and add a correction notice to explain any special circumstances.

Apply to other lenders

You need to be aware that if you apply to lots of lenders this will leave a trail on your credit reference file. This may affect your credit score as lenders may think you already have lots of borrowing or have been refused by other creditors. If you are finding it difficult to borrow from mainstream lenders such as banks and credit card companies, check if there's a credit union in your area. Beware of borrowing from illegal money-lenders (loan sharks). For more information about credit unions and loan sharks, see Types of borrowing.

Look at other ways to raise the money

If you need money for a particular reason that you can't do without, there may be other ways you can raise the money. For example, if you are on certain benefits, you may be able to get an interest free loan or a grant from the Social Fund. For more information about the Social Fund, see Help for people on a low income - the Social Fund. If you are on a low income and struggling to afford an essential item, such as a fridge or washing machine, you may be able to get help from a charity or other organisation that helps people. You can get help to apply to a charity from an adviser at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB

How Lenders Interpret Your Credit Report

As mentioned on the previous page, your credit report only relays the history of your dealings with creditors. However, you need to look closely. There's information there that may seem innocent to you but not to potential creditors. This includes information like: Inquiries - Every time you apply for a credit card to get a free travel mug, duffel bag, or T-shirt, you are adding another hard inquiry to your credit report. When potential lenders see these inquiries, it may wrongly imply that you're either in some financial situation where you need a lot of credit, or are planning to take on a large debt. Either can flag you as a high credit risk. Other types of inquiries, such as your own requests to view the report, employer requests to view the report and requests by marketers to get your name in order to sell you something, count as soft inquiries. These inquiries don't show up on the reports that lenders see, and therefore don't affect how they view your credit. Also, watch out when you are car shopping or mortgage shopping. Make sure you don't let the car dealer or mortgage broker run your credit unless you know you're going to be buying from them. While the FCRA allows these types of multiple credit inquiries that are within seven to 14 days of each other to be counted as a single inquiry, you would have to be careful of your timing to make sure you don't have multiple inquiries show up. So, how many hard inquiries can you have without a problem? Some experts say that if you have 10 credit card inquiries in six months, that will probably scare a lender. Others experts say that as few as six credit card inquiries in six months can label you as risky. Inquiries that are older than six months may not be looked at as strongly because if you actually set up the loan or opened the credit card account, those accounts would now be showing up on your report as well. The newer inquiries might lead the lender to think that you actually have the credit accounts available now but they haven't shown up on the credit report yet. Most inquiries drop off of your report after two years. Open credit accounts - Another thing to watch out for as you gather all of those free mugs and duffel bags is that even though you may have forgotten about them, accounts you don't use still count toward your total available credit. Just as with the hard inquiries we've talked about, these can indicate to a potential lender that you could easily put yourself into financial danger with all of that readily available credit. According to TransUnion and Experian, you should not close out your oldest card, because it has the most history on it; also, you should maintain four to six credit cards to "keep your credit score and debt balances healthy" [source: TransUnion]. But other than that, close the accounts you don't use. In addition to avoiding excessive available credit, you're limiting your exposure to identity theft. Cutting up the card or just not using it doesn't mean the account is closed. You have to call or write to the card company and ask to close the account. Missed payments - Obviously, your payment history makes a big difference. You should always make at least the minimum payment, or consolidate accounts to reduce your payments. These delinquencies stay on your report for seven years -- even if you've caught up your payments! The same goes for accounts that creditors have turned over to collection agencies or charged-off -- meaning that they've written the account off as a loss. Even if you do pay off the account at a later date, the charge-off or collection action stays on your report for seven years. Maxed-out credit lines - Another thing that scares lenders is a maxed-out credit line (or two). This waves a big red flag and indicates that you may be financially strapped for some reason. Some experts suggest moving debt around if this is the case. For example, if you have a maxed-out card but have other cards

that haven't reached their credit limits, you might consider moving some of the debt from the maxed-out card to the non-maxed-out ones. Debt in relation to income - If you have unsecured credit card debt that is more than 20 percent of your annual income, lenders may not want to give you the best deal on a loan -- if they'll take the chance and give you a loan in the first place. Work to reduce the debt-to-income ratio and you'll be able to get better rates on the loans you seek. Now, let's look at how you and others can access your credit report.

The Importance of Good Credit

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If youre thinking about buying a home, you need to be aware of your credit. Better credit may mean mortgage opportunities with lower rates.

Your Credit Report

Your credit report is a record of money you've borrowed, your history of paying it back and how much open credit is available to you. It consists of:

A list of debts and a history of how you've paid them, including credit cards, car loans and student loans. Any bills referred to a collection agency, such as utility or medical bills that you did not pay or were significantly late. Public-record information, such as tax liens and bankruptcies that may be linked to you. Inquiries made about your creditworthiness, showing how many inquiries were made for your credit and if you were given credit based on the inquiry.

Your Credit Score

Your credit score is a single number that helps lenders decide how likely you are to repay your debts and plays a significant role when securing a mortgage. A score ranges from 300 850 points and is based on:

Your payment history and ability to repay your debts on time. Late payments will decrease your credit score. The amount of total debt you owe, including credit cards, student loans and car loans. If your credit cards are at their limits, this can lower your credit score - even if the amount you owe isn't large. How long you've used credit and how youve managed it. If you show a pattern of managing your credit wisely, keeping credit card balances low and paying your bills on time, your credit score will be positively affected. How often you apply for new credit and take on new debt. If you've applied for several credit cards at the same time, your credit score can go down. The types of credit you currently use, including credit cards, retail accounts, installment loans, finance company accounts and mortgages. A general guide to interpreting your score:

Credit scores ranging from 770 to 850 are considered very good, and the best credit rates are usually available to borrowers within this range. Credit scores above 700 are considered good, and most borrowers' credit scores are within this range. The median credit score is about 725. Credit scores below the mid-600s may have difficulty obtaining a loan, and will experience higher interest rates and/ or larger down payments. You are entitled by law to get a free copy of your credit report:

Every 12 months Every time you find a mistake and want to make sure it's been fixed If you've been denied credit and in certain other situations, such as fraud To get your annual free credit report, go to www.annualcreditreport.com or call (877) 322-8228. For more information about your rights regarding credit and the Fair Credit Reporting Act, visit the Federal Trade Commission Web site.

Helpful Tips
To help you build, maintain and protect your credit:

Establish credit if you don't have any. Open a free or low-cost checking or savings account and apply for one or two credit cards but use them carefully. It is important for lenders to verify that you have a credit history to determine your ability to repay your debts Limit your number of credit cards and try to pay the balances in full every month. Using your credit cards responsibly can help you build excellent credit. Honor your promise to pay your debts. With good credit, you can borrow for other major expenses, such as a home, car, or education, at a lower cost ultimately saving you money. Seek the guidance of a HUD approved counseling agency for free, confidential advice if you run into problems paying your bills. The sooner you reach out, the more likely they can help you. Be sure to protect your private information. Do not provide any personal information (such as your social security number or credit card numbers) over the phone, online or through the mail unless you know the person or company. By understanding your credit and the important role it plays with securing a home loan, youll be on the right path to realizing your goals. Remember, strong credit will provide you with many fin ancial advantages so its worth the effort to maintain it.

Applying for and Getting Your Mortgage

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An important step to becoming a homeowner is completing your mortgage loan application (officially referred to as the Uniform Residential Loan Application). This is a lengthy application that documents your personal information (Social Security Number, date of birth, etc.), employment information, assets and liabilities, mortgage terms and much more. Youll want to work with your lender to complete all fields, especially as they relate to the type of mortgage and terms.

Once you and any co-borrowers have completed and signed the application, your lender will:

Pull your credit report and score from all three major agencies to verify your credit history. Make sure you know what they find. Evaluate the four Cs to determine if you are creditworthy: Capacity - Current and future ability to make payments

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Capital or cash reserves - Money, savings and investments you have that can be sold quickly for cash Collateral - The property that you will purchase Credit - Your history of paying bills and other debts on time At this point, your lender can provide you with a pre-approval letter that outlines how much you qualify to borrow and the specific terms of the loan. Now, you can begin looking for your new home with greater confidence. Once you have found the home you want to buy and have signed a Purchase Agreement for the property, you are ready to complete the application process by providing your lender with the address and property details. Your lender will then:

Get an appraisal to determine the market value of the property, because it will be used as collateral for your loan. You have a legal right to get a copy of this and will want a copy for your records. Issue a Commitment Letter detailing the terms of your loan approval. The Commitment Letter serves as final approval of your mortgage loan and states the terms of the approval. Once you receive and accept this, you are assured the financing needed to complete the purchase of your home and can now focus on completing the details required for closing.

How Do Appraisals Affect Your Mortgage? - Zillow

Appraisals: What Homeowners Need to Know
During an appraisal, an expert evaluates your home and property and gives you an estimate on how much it is worth. Appraisals are conducted by professionals who are licensed by the state -- they have to take courses and do an internship to get licensed -- to do evaluations of homes. Heres what you need to know about appraisals.

When do you get an appraisal?

Often, your mortgage lender will require you to get an appraisal on the home you want to buy before they will lend you the money to buy it. This helps them ensure the property could sell for the amount of money they are lending you. So, if the asking price of the home is significantly higher than the appraisal value, the lender might not lend you the money. If you are refinancing your home, your lender will likely want an appraisal for the same reason. Also, you may want to get an appraisal on your home if youre thinking about selling it: This can help you determine how much to ask for the home.

What does an appraisal cost?

The average appraisal costs about $400, but that figure varies depending on the size and value of the home (appraisals typically cost more for larger and more valuable homes). The cost will also vary depending on the type of appraisal -- if the appraiser has to go into the home (this is the most common type of appraisal) rather than just drive by the property (this type of appraisal is typically only done when the value of the home is pretty certain already), this will cost more.

What do appraisers look for when they value your home?

To determine the value of the home, the appraiser will look at the size and type of the home and property, the condition the home and property and the overall real estate market in the area (what are similar homes selling for?). The appraiser will note things including any flaws to the property (a leaky roof or cracked foundation), the area around your home (is this home in a development?) and even the estimated time it would take to sell the property. Basically, the appraiser is trying to determine the fair market value for your home, so most anything that would lower or increase the price someone is willing to pay for your home may be considered.

What can you do to increase the appraised value of your home?

The condition of your home affects its appraised value. So, you can increase the value of your home if you do repairs and improvements. Fix anything thats broken, and consider doing some improvements such as updating the kitchen or bathroom. Also, make sure the home and yard are clean and uncluttered when the appraiser comes by. If that doesn't significantly improve the appraisal value of the home, consider getting another appraisal.