Unfortunately, thousands of potential home owners are denied mortgages every year because of poor credit ratings. As surprising as it may sound, many individuals are completely unaware that they have a derogatory credit rating. While they may know they missed a few payments along the way, often times they have no idea this action may later result in a mortgage application being denied.

For starters, I strongly recommend everyone run a credit check on themselves at least once a year. (To do your own credit check, you can go on-line and for a small fee generate your own report.) The reason is twofold. Firstly, it will reveal your current credit rating, allow you to review it in depth, and also ensure any reporting mistakes are corrected. Secondly, given the rampant amount of fraudulent activities with credit cards, it will make certain there are no irregularities with your credit.

Each credit bureau has devised its own standards and formulas for computing a score (rating). These scores are then used by lenders to identify the creditworthiness of the applicant. Credit scores range from 350 (a high risk of default) to 850/950 (a very low risk category).

The credit bureau does not consider income, savings, down payment amount, or other demographic variables such as race, religion, gender or marital status, when computing a rating.

The table below gives an average outline of how a score is devised. It should be noted that it takes at least six months of activity on your file before a credit score is registered.

** Previous credit performance 35%

** Current level of debt 30%

** Length of time credit has been in use 15%

** Types of credit facilities available (ie installment loans, revolving loans, etc.) 15%

** Number of recent inquiries 5%

Thus it’s obvious that the single most important way to generate a good credit rating is to pay your bills on time!!! Additionally, keeping low balances on each credit facility also helps improve your credit score.

Previously, individuals who were doing a lot of mortgage rate shopping would get penalized and their score would be lowered. Today, thanks to the recent changes with the credit bureau rating system, this is no longer the case. For example, if you were shopping for the best mortgage rate and consequently several lenders performed a credit check on you, in the past this would have reduced your credit rating. Today, while each inquiry will still appear on your credit rating, it won't have a negative impact on your score.

A credit score of 600 or greater means you can buy a home today with all the financing options available in the marketplace. A rating that’s less than 600 means you may be required to either increase your down payment, pay a higher interest rate, or obtain a co-signer.

On the positive side, be cognizant that poor credit ratings can be mended and improved over time. The first step to doing this is to bring all accounts that are in arrears into good standing. Afterwards, be sure to stay current with any existing debt.

It should be noted that an individual's credit history remains on file for six years. For example, a declaration of bankruptcy would remain on the applicant’s file for six years. If you did declare bankruptcy and you have been discharged for two years while establishing unblemished credit for at least one year, you may still be eligible to secure a mortgage.