It is crucial that you have a credit history, know what it is, and understand how it impacts your ability to get a loan-before you initiate the mortgage loan process. That's because lenders and credit-scoring systems weigh your credit history very heavily when considering your loan application. Here's what you need to know:

• Establish a credit history.
  It is important that you have a credit history so that lenders have a method of predicting, based on your payment records, that the mortgage loan will be repaid. Those who have paid their rent and bills on time in the past are more likely to do so in the future.

• Keep your credit report clean.
  When assessing your credit history, lenders rely heavily on your credit report. It shows your past and current mortgage payments, verifies other debts rates your ability to pay debts on time, and tells how long you have until debts are paid off. On your credit report, lenders look at two important things:
  1. Mortgage Payment History
     Most credit-scoring systems use your mortgage payment history as the primary determinant in assessing your credit quality. Because late mortgage payments show on your credit report as defaulting on a loan, any history of late or non-payments will have a negative effect on your credit for at least two years.

  2. Installment and Revolving Payment History
     Lenders also look at your installment and revolving payment history, which includes credit cards, car loans, and gas or department store cards. Your credit report shows the lender any liens, judgments, or collections against you and reveals whether you have filed for bankruptcy. If you have not yet established any credit, you can document any monthly bills you have paid in the past, such as utilities and rent.

• Understand how lenders evaluate your credit.
  Borrowers with the best credit ratings get the best interest rates and loan programs. Thus, the best interest rates are made available to borrowers whose credit quality is rated A. Lenders use two methods to evaluate credit:
  1. Grading
     When grading, lenders actually grade your credit quality (A through D) depending on the frequency and severity of overdue payments.

  2. Credit Score
     With credit scoring, a score is automatically calculated when your credit file is accessed from the credit bureau. It is meaningless by itself and must be used with a cut-off strategy (i.e. your score should be 660 or higher for an A-quality loan). The purpose of using credit scoring is to find the best programs available.

• Know your credit history.
  Your credit doesn't have to be a mystery. The more you know about your own history and quality rating, the better prepared you'll be when you decide to obtain a mortgage.

• Keep imperfect credit in perspective.
  In real life, there are times when people are unable to make timely payments. Illness, divorce, and temporary financial troubles are all common events that can directly affect your ability to pay bills on time. Will you be forever penalized for a couple of missed or late payments? Fortunately, time will heal your credit injuries-as long as you reestablish a timely payment history.

• Look for more flexible loan programs.
  Lenders now realize the need for more flexible loan programs that allow for a variety of payment histories and credit ratings. The rates for alternative credit programs can vary, depending on your grade and/or score, but are generally between 1 and 4 percentage points higher than the conforming program rates, which are usually the rates that are advertised.