Credit
Your credit rating certainly does affect your ability to obtain a mortgage. There is no need to worry if you do not have a perfect credit history, as a credit history less than perfect does not necessarily mean that you will be turned down for a mortgage.

Any credit problems you may have had should be discussed though with your mortgage professional. These professionals understand that there are legitimate reasons why a borrower may have had credit problems. If you have dealt with the problems and your credit history has been good for 12 months or more, then more than likely you will qualify for a mortgage.

Determining Your Credit
Credit, Capacity, Collateral and Character are all terms describing categories that when looked at as a whole, determine your credit history as a potential borrower. Your credit-worthiness comes from such factors as your income, your debt payments, and any bankruptcies you may have had.

Credit
The first step in the loan process is the credit check. The lender needs this as it gives an indication as to how you will pay off any loans by looking at your previous loans and any problems associated with them.

Capacity
Do you have enough income to make your mortgage payments each month and still have enough money to live on? This is what the term capacity means. Your proposed monthly housing payment (mortgage + property tax + insurance) is added to your other monthly debts such as credit cards and loans, and it is then divided by your gross monthly income.

There is a standard guideline that is called the "Fannie Mae" guideline which states that your "Debt-to-Income" (DTI) ratio should not exceed 36%, but some of the lenders we work with will allow us to up that figure to 40% or even higher if there are compensating factors such as a large down payment and an excellent credit history.

Collateral
Collateral is the value of the property you are buying. An appraisal report is required to verify the value of the property as you are "pledging" it as collateral for the loan. If you were not able to make your mortgage payments, the lender would be able to seize your property and sell it as a foreclosure to meet the debt. If the home were worth less than you paid for it, then the lender would incur a larger loss.

Character
Character is the term used to describe on a subjective basis, the underwriter's determination of your over-all financial situation. Job stability, continued employment and your proven record of saving and handling credit wisely will all contribute to this determination of your character.