Coming Clean with Credit
Credit can be a wonderful thing, but, like eating cake, too much of a good thing can backfire on you. And for wannabe homeowners, loan approval relies more on your history of debt repayment than on your income or savings.
How do you know if your credit history is healthy? First, don't rely on guesswork. Order a copy of your credit record, preferably three months before applying for a loan. You'll see where you stand and have time to clear up errors, which are a common finding, on your record.How is credit risk measured?
In today's lending market, most credit reports are automated, relying on a credit "scoring" system that analyzes about 100 variables to gauge the likelihood that the borrower will make on-time payments.
The information measured is gathered from retailers, public records, and sometimes credit applications and bank records. The score analyzes patterns over time, with more recent payment and debt habits holding greater weight. In the scoring system used by Fair, Isaac—the originators of scoring software—the main criteria and their approximate percentage of importance are:
§                     Payment history (35%)
§                     Amounts owed (30%)
§                     Length of credit history (15%)
§                     New credit—a warning of taking on too much debt (10%)
§                     Types of credit in use (10%)

Lenders use these credit scores, which range from 400 to 900 points, along with information such as the stability of your income, your employment history, and the value of any collateral and liquid assets, to determine your credit risk.

The lender then assigns you a grade from A to D, A being the lowest risk and D the highest. You may receive an "A" rating even with a past bankruptcy; although 10 percent of homeowners have credit problems, 95 percent of mortgage applicants receive an A or A–. You may even qualify for a non-conventional loan with a B, C, or D grade, but expect to pay a higher interest rate.