| |  | | Credit Check | Among the many documents you will sign when you apply for a mortgage will be one that gives the lender permission to check your credit history.
The lender checks your credit to determine whether or not you consistently meet your financial obligations. It is one of the tools they use in deciding whether to approve your mortgage request.
A credit check will reveal if you have paid your bills on time and, if not, how late they were paid; if you have outstanding debt that was never repaid; if you have declared bankruptcy; how many credit cards and other credit lines you have open, the balances and limits, and more.
It will tell the bank whether you have established a record of paying bills and repaying debt in a timely manner, or if you have a history of late payments and taking on more debt than you can repay. This information will be valuable as the lender determines whether or not it can trust you to make your monthly mortgage payments on time for a long period of time.
The credit check may reveal that you have perfect credit-- something that happens only about 20 percent of the time-- or that you have some explaining to do.
For example, if the only blemish on your credit card, you may be asked to write a letter explaining why the payment was late. If the offense is more serious-- unpaid debt, several late payments, a missed car payment, etc.-- it will be harder to explain. The lender may be willing to work with you to repair your credit or you may be deemed not credit-worthy and turned down.
Serious problems may be revealed during a credit check. Your name may get mixed up with someone else's, and the lender may get a completely wrong picture of your finances. Or an unpaid debt that you later paid could show up on the reports being outstanding.
One way to avoid these mistakes is to review your own credit history yourself before you apply for a mortgage. The three major credit bureaus that operate in the United States are obligated to give you a copy of your credit report upon request. You may be charged a minimum for your credit report to be obtained and also by the mortgage lender for the report they request from the credit bureau. However, the report you receive and the one the mortgage lender sees will be different. Their's will be a more current report, so if you have paid off a credit card debt or made any corrections, they will get the updated version. If it reveals problems you were unaware of, you can work to clear them up before you apply for a mortgage.
An important tip to remember is that the lender will check your credit twice-- once shortly after you apply for the mortgage, and once again just days before your loan approval. The lender does this to make sure that you haven't substantially increased your debt burden by buying a new car, for example.
By checking your credit report before the lender does and being conscientious about your finances, you will increase your chances of being approved for a mortgage.
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