Your ability to obtain a mortgage loan depends on your financial habits which are tracked by creditors. Before extending credit, lenders will want to examine the risk of not getting the money back. Credit reporting agencies receive information from credit grantors about how people have paid back bills and other credit obligations and then provide that information to those who extend credit. From this information lenders can develop an idea of just how you will handle your responsibilities once you have signed the contract for repaying the loan.

There are over 1,000 local and regional credit bureaus throughout the United States. Most credit bureaus are either owned or under contract with one of the nations three major credit reporting agencies:
    
          A. Equifax
          B. TransUnion
          C. Experian
    
These national agencies maintain centralized databases containing the credit records of more than 170 million Americans.

Lenders turn to these credit reporting agencies when a borrower applies for a mortgage loan. Lenders take the credit information and determine a "Credit Score" for the potential borrower. "Credit Scoring" is a statistical method that lenders use to quickly and objectively assess the credit risk of the applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (High Risk) to 950 (Low Risk). There are a few types of credit scores: the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies. Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower you score, but establishing or reestablishing a good track record of making payment on time will raise your score.
    
    

    
Here are how lenders rank the FICO Credit Scores when it determines the borrower's Credit Category. The credit category determines several conditions of the mortgage loan including what interest rate the lender will charge the borrower and how much principal the lender will grant vs the value of the property as well as the term of the loan. We have also listed the national "Delinquency Rates" for each of the credit categories that lenders experience.
    

*Note - The interest rate used above in our example is only a "sample" rate and not todays actual rate. each interest rate increase based on the lower credit score is also only an example and the spread between each credit score may change as interest rates rise or fall in the future. We have also used a 30 year fixed rate mortgage loan with a 20% down payment as our sample example in the table above. The size of the loan used was a conventional conforming loan, not a jumbo loan.
    
The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to keep balances low on credit cards and other revolving credit, apply for and open new credit account only as needed, and pay off debt rather than moving it around. Also don't close unused cards as a short term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
   
    

    
There are 5 major components that make up your credit score.
    

    
Every score is accompanies by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act. Your credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage loan.
    
Make sure you know what's in your credit report before applying for a mortgage loan. That way if there are any errors you can take steps to correct them before you make your application. It is estimated that 50% of all credit reports contain errors significant enough for an individual to be denied a loan. There are basically two types of credit reports available to consumers, "individual" or "merged" reports. Individual reports are provided by the three major agencies listed above. Merged reports offer information from all three of the agencies. Examine the credit report carefully to see if it is up to date and correct. If you find an error, complete the Research Request Form that is sent along with your Credit Profile, and give details of the information you believe is incorrect. Include any documentation that supports your claim. Send it certified mail. The credit bureau must correct any errors in the report. If there are unsettled disputes over certain accounts, it must also include your side of the argument in the report. If the credit report is accurate and you have a questionable credit history, you need to start repaying outstanding balances on time in order to re-establish an acceptable record.
    
If you need help dealing with your debts, you may want to contact the Consumer Credit Counseling Service. CCCS has more than 1,200 offices throughout the country. This nonprofit organization can help you analyze your situation and work with you and your creditors to establish a repayment plan that will satisfy both you and your creditors.
    
    
You can request a free copy of your report within 60 days of being adversely affected by information in your report. You are also entitled to a free report every twelve months if you certify that:
    
     1) you are unemployed and plan to seek employment within 60 days,
     2) you are on welfare or
     3) your report is inaccurate due to fraud.
    
In addition, some states have enacted legislation that requires the three major credit bureaus to provide consumers with one free credit report per year. The use of consumer credit reports is controlled by a federal law known as the Fair Credit Reporting Act. This law protects consumer's rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity.