Credit Report

• Individuals should check their credit history before applying for a home loan. According to the Federal Trade Commission (FTC), consumers can access a credit report from each of the three major credit bureaus, including TransUnion, Equifax and Experian, once a year. If individuals notice any errors in their credit report, they have a right to dispute these items by sending a letter to the offending credit bureau. The dispute process can remove negative items from a consumer's credit report which will improve his chances of obtaining a home loan.
  
  

Credit Score

• Lenders pull credit scores from the three major credit unions in order to determine the creditworthiness of a mortgage borrower. As of April 2011, consumers can pay $15.95 per bureau to access their Fair Isaac Corporation (FICO) scores. According to myFICO, borrowers with a low FICO credit score between 620 and 639 will pay an average 6.122 percent interest rate annually, and borrowers with a high score between 760 and 850 will only pay 4.533 percent annual interest on a mortgage. A borrower can improve his credit scores by reducing his debt, paying his bills on time and not opening new lines of credit before he applies for a mortgage according to Experian.
  
  

Debt Ratio

• Lenders use both a back end and front end debt to income (DTI) ratio when calculating whether a borrower can afford her monthly mortgage payments. A front end ratio describes an individual's mortgage payment as a percentage of her gross income, and a back end ratio describes an individual's mortgage, minimum credit card, personal loan and car note payments as a percentage of gross income.
  
  

Considerations

• According to Debt Income, borrowers should have a front end DTI of no greater than 28 percent and a back end DTI ratio of no greater than 36 percent although lending standards vary. For example, a home loan shopper who makes $50,000 in gross income a year, wants a mortgage with a monthly payment of $800 and makes $500 in minimum credit card payments per month has a front end DTI ratio of 19 percent and a back end DTI ratio of 31 percent. Home loan shoppers can improve their front end DTI ratio by earning more money or shopping for a less expensive home, and they can quickly improve their back end DTI ratio by paying off some of their personal debt.